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Europe Equity Research

23 January 2009

BKIR.I, BKIR ID
Underweight
€0.37
Irish banks Price Target: €0.50

Is there still a way out? Assessing recapitalisation ALBK.I, ALBK ID


Underweight
options fro BOI and AIB €0.57
Price Target: €1.20

• Three main alternatives to recapitalize BOI and AIB – (i) The Banks
continuation of the recapitalization program announced by the government AC
Ignacio Cerezo
in December, though requiring €3.8bn capital for BOI and €4.8bn for AIB, (44-20) 7325-4425
instead of the €2-3bn proposed at the time, (ii) A loan protection scheme, in ignacio.cerezo@jpmorgan.com
line with the UK, where the Irish government guarantees credit losses over
Andrea Unzueta
and above a preset first loss piece borne by banks, implying c.€5.0-5.5bn (44-20) 7325-7454
injection (35-40% by shareholders), (iii) The creation of a good/bad bank andrea.e.unzueta@jpmorgan.com
structure, where the government purchases a selection of problematic loans J.P. Morgan Securities Ltd.
from banks at a significant discount, and runs the bad bank going forward.
For Specialist Sales Advice,
• Good/bad bank best relative option – implying a higher capital injection please contact:
for shareholders (€5.0-5.3bn vs. €1.8-3.6bn), it offers them the chance to Oliver Doeltl
look at a clean bank (higher returns, lower capital requirements) in an (44-20) 7779-2187
accelerated fashion, without any government’s management influence. For oliver.doeltl@jpmorgan.com

the government, it brings the option to present the whole process as one Nick Gough
where no additional taxpayers’ money needs to be directly injected, and (44-20) 7325-9459
accelerates a potential economic/lending recovery. Historically, this has nick.c.gough@jpmorgan.com

proved as the most effective tool to manage similar situations. Justine Shih
(44-20) 7779 2149
• Returns not too compelling under any scenario, full nationalization justine.shih@jpmorgan.com
risks in place, stay UW – despite having assumed higher PNAV multiples
in a good-bad bank scheme and sticking to our view about both BOI/AIB
having viable business models in the long run, we do not find material
upside for shareholders under any scenario over a reasonable period of time,
making private investments a more unlikely option. Hence, we retain our
UW on both AIB (€1.2 Dec-09 SOP PT) and BOI (€0.5 Dec-09 SOP PT),
as, in our view, risks of outright nationalization should be seriously
considered if efforts to find private investors fail and government ends up as
the sole provider of equity. (See Table 16 for earnings estimate changes).
Table 1: Irish banks – Summary features of the three potential recapitalization programs
AIB BOI
Capital APS Bad bank Capital injection APS Bad bank
injection
Total capital needed 4,812 5,624 5,291 3,795 5,345 5,018
Direct cost for government 2,000 2,000 0 2,000 2,000 0
Cost for shareholders 2,812 3,624 5,291 1,795 3,354 5,018
Ownership post action
government 39% 32% 0% 48% 35% 0%
other shareholders 61% 68% 100% 52% 65% 100%
NAV/share 1.48 0.80 0.49 0.67 0.22 0.07
P/NAV 0.43 0.81 1.31 0.52 1.31 2.88
Core Tier 1 ratio 08E 9.3% 7.0% 6.0% 9.2% 7.0% 6.0%
Tangible equity to assets 7.3% 4.4% 2.7% 4.7% 2.5% 1.0%
% RWA reduction 0% -20% -48% 0% -20% -54%
Source: JP Morgan Estimates

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Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

Is there still a way out? Analyzing the


options to recapitalize AIB and BOI
It can hardly come as a surprise if we say we have felt clear signs of capitulation of
investors with respect to Bank of Ireland and AIB’s future as listed, privately owned
entities, following the nationalization of Anglo Irish and widespread skepticism
about the health of global banking stocks accelerating their share price declines in the
last week. With both banks' capital bases looking insufficient to absorb the
accumulated credit losses likely to be faced in coming years, the assumption the
market appears to be taking is one where private money cannot be found to
recapitalize Irish banks, hence leaving an outright nationalization as the default
solution for both entities.

Having flagged our concerns about their solvency since our initiation, we also stick
to our view about AIB/BOI appearing as viable entities in the medium term provided
a full recapitalization is implemented, given their dominant market shares in Ireland
and their extensive deposit franchises, both features that Anglo was missing in our
opinion. Rather than venturing to forecast the likely outcome of Irish banks' future
status, the purpose of this note to present the three main scenarios we believe arise as
the most likely options at this stage, flag their advantages and disadvantages and
determine their implications for shareholders;

a) The continuation of the recapitalization program already announced by the


government back in December, though under more onerous conditions than those
presented then, both in terms of the dilution implied in current share prices and
especially with regards to the amount of capital needed (c.€4-5bn in our updated
forecasts vs. €2-3bn planned by the government). Qualitatively, we have assumed the
government subscribes €2bn of that rights issue, and private shareholders the rest,
though that might end up proving too an optimistic assumption.

b) A loan protection scheme, consistent with that announced by the UK Treasury


earlier this week, where the Irish government would guarantee credit losses over and
above a preset first loss piece borne by banks (15% of our bad bank calculations we
have assumed). In exchange, banks pay an upfront or annual fee for that guarantee,
and are also responsible for a 10% residual exposure beyond that first loss piece.

c) The creation of a good bank/bad bank structure, where the government


purchases a selection of problematic loans from banks at a significant discount,
probably in exchange of some government bonds, and runs that “bad bank” on its
own going forward. Shareholders lose their existing equity to cover credit losses,
and will have to inject fresh capital to replenish the bank’s solvency, but will also
benefit from a “clean bank” with much improved earnings generation and materially
lower Basel II capital requirements.

At this point, when valuations are already discounting a full stress scenario, it goes
without saying that none of these three approaches is exempt of risks or can
described as a positive solution in absolute terms, neither for the government nor for
banks’ shareholders. In fact, we believe a reasonable balance between the interests of

2
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

all parties involved is essential, without which a full nationalization appears as the
most likely outcome.

For the government, the main reward arising from a properly functioning banking
system providing with adequate levels of new lending comes from at least putting the
brakes on the accelerated downturn the Irish economy is now immerse, after years of
heavy property-led expansion. In turn, and considering the amount of criticism
already received in the press and public opinion, we do not expect the government to
adopt a too "generous" stance towards banks and banks' shareholders, aware of
sizeable amounts of taxpayers' money being at stake, and growing consensus about
the excess risks taken by banks in recent years. In other words, its status as “lender of
last resort” for banks makes us assume the bargaining power throughout the process
is more on the government’s side, this being reflected in some of our assumptions.

For shareholders, extensive dilution derived from the virtually total loss of equity
value is unlikely to be reverted in the foreseeable future under any of the three
scenarios, given the ample capital injections needed to replenish banks’ solvency and
the still challenging environment affecting Ireland and UK, two of the most
overleveraged economies in Europe. In other words, any shareholder willing to
participate in a potential rights issue for AIB or BOI needs to be aware of the costly
and long-term nature of that investment, even at such seemingly depressed prices as
those seen today. Earnings generation will remain subdued, with risks to the
downside, and dividends appear as a distant option for the time being. In addition,
two of the scenarios we suggest would involve government’s partial ownership of the
banks, this always raising questions about profitability being at the top of
management’s priority list.

With all this in mind, we present below a summary of the main numerical and
qualitative implications of the three methods we analyze throughout the note. As
seen in the table, we foresee capital injections ranging from €4.8bn to €5.6bn for
AIB and €3.8bn to €5.3bn for BOI, or lower €2.8-5.3bn and €1.8bn-5.0bn capital
requirements for shareholders.

Table 2: Irish banks – Summary features of the three potential recapitalization programs
AIB BOI
Capital injection APS Bad bank Capital injection APS Bad bank
Total capital needed 4,812 5,624 5,291 3,795 5,345 5,018
Direct cost for government 2,000 2,000 0 2,000 2,000 0
Cost for shareholders 2,812 3,624 5,291 1,795 3,354 5,018
Ownership post action
government 39% 32% 0% 48% 35% 0%
other shareholders 61% 68% 100% 52% 65% 100%
NAV/share 1.48 0.80 0.49 0.67 0.27 0.12
P/NAV 0.43 0.81 1.31 0.52 1.31 2.88
Core Tier 1 ratio 08E 9.3% 7.0% 6.0% 9.2% 7.0% 6.0%
% RWA reduction 0% -20% -48% 0% -20% -54%
Source: JP Morgan Estimates

3
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

We derive two main conclusions from our analysis

1. On a relative basis, a good bank- bad bank structure stands as the most
attractive option for both parties, provided conditions for banks are reasonable.
Main reasons behind our opinion are the following;

a) Accelerates a potential (slow) recovery of lending activity and hence the


economy, which can only be seen positively by the government and banks
themselves.

b) It offers the government the option to present the whole process as one
where no additional taxpayers’ money needs to be injected, at least in
the short term, making it more easily digestible for Ireland’s public opinion.

c) For shareholders, such a scheme should be seen as "short term pain,


potential long term gain". On a positive note, it offers them the chance to
look at a clean bank in an accelerated fashion, avoiding management
distraction once problematic loans are removed from the balance sheet and
sold to the government, which should not have any influence on how the
good bank is run going forward. Naturally, this will come at a higher cost
(i.e. bigger rights issue) than if any of the other methods are followed, but
we believe it is also likely to offer higher returns in a shorter period of time,
as the clean bank will generate a more resilient earnings stream and will
need to operate with structurally lower regulatory capital ratios.

2. Upside from current prices does not look impressive under any of the three
scenarios –
In direct relationship with the returns investors should expect from Irish banks in a
post recapitalization environment, we have attempted to throw some light on how
potential NAV/share levels would look like under the three scenarios, linking them
with the PNAV multiple we believe investors should/would be ready to pay. We
fully accept the limitations of this exercise given the high level of subjectivity
embedded in our estimates and the lack of details about which approach will be used
and under what terms, though we are comfortable with the qualitative conclusions it
offers, and hope it somehow contributes to the ongoing debate.

a) As shown in the table, and again without trying to be dogmatic over the
exact figures, we assume higher PNAV multiples on the good-bad bank
structure (2.0x for AIB, 3.0x for BOI), as a clean bank would more easily
achieve returns over a much leaner equity base and less risky balance sheet
in the 20-40% region in a reasonably accelerated way. the asset protection
scheme appears as an intermediate option, and we have assumed banks'
RONAV sits close to their 10% COE, hence applying a 1.0x NAV multiple,
as investors are protected by the government's guarantee. Finally, the
normal capitalization scenario throws lower returns (c.0.5x PNAV), as
credit losses will still come through the P&L in a normal manner, and given
the risks of final losses being higher than our assumptions, and hence
leading to additional capital injections.

b) We have assumed higher returns for BOI given its lower tangible equity
to assets ratio, before and after a recapitalization, as our earnings
expectations are based on similar assumptions for both banks.

4
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

c) Share price returns cannot be described as particularly compelling


under any of the scenarios if one stops to think about the accumulated
declines seen in the last year, which have virtually eliminated the equity
value of both banks. Unless some of our various assumptions prove too
conservative or investors with a particularly long-term investment horizon
arise

Table 3: AIB/BOI – Valuation potential under the three recapitalization options


AIB BOI
Rights Issue APS Bad bank Rights issue APS Bad Bank
Capital injection 4,812 5,624 5,291 3,795 5,354 5,018
o..w. shareholders 2,812 3,624 0 1,795 3,354 5,018
NAV 12,510 7,704 4,466 7,934 4,357 1,861
NOSH 8,418 9,647 9,128 11,528 15,858 14,925
NAV/share 1.49 0.80 0.49 0.69 0.27 0.12
P/NAV 0.43 0.81 1.31 0.52 1.31 2.88
Core Tier 1 ratio 9.3% 7.0% 6.0% 9.2% 7.0% 6.0%
Tangible equity/assets 7.3% 4.4% 2.7% 4.7% 2.5% 1.0%
Fair PNAV 0.4 1.0 2.0 0.5 1.3 3.5
Current price 0.64 0.64 0.64 0.35 0.35 0.35
Fair price 0.59 0.80 0.98 0.34 0.35 0.43
Upside/downside (%) -7% 25% 53% -4% -1% 21%
Implied RoNAV 4% 10% 20% 5% 13% 35%
Source: Company reports and J.P. Morgan estimates.

With this in mind, we retain our UW on both AIB and BOI, as risks of outright
nationalization have to be seriously considered if efforts to find private investors fail
to materialize and the government ends up as the sole provider of equity for the two
banks. A properly thought recapitalization program, with more attractive conditions
for shareholders than those implied in the assumptions presented in this note could
make us reconsider our stance on BOI and AIB, though too much uncertainty
remains in place to adopt a more positive stance at this stage. We have cut our Dec-
09 SOP PT on both AIB (to €1.2 from €3.5) and BOI (from €1.2 to 0.5), though note
both figures do not incorporate any potential recapitalization program.

Risks to our Rating and PT: Table 4: AIB – SOP 2010 Valuation (€ mn)
Upside risks to earnings and PT
Net profit Valuation Valuation basis Per share (€) P/BV (x)
are (i) material improvement of
AIB Bank ROI -419 3,087 RoE - g/CoE - g 3.4 0.7
Ireland/UK economic conditions, (ii)
AIB Bank UK -30 547 RoE - g/CoE - g 0.6 0.6
softer than expected correction of Capital Markets -23 1,677 RoE - g/CoE - g 1.8 0.5
Ireland/UK property market, (iii) Poland 180 1,195 RoE - g/CoE - g 1.3 2.4
sizeable easing of ECB’s monetary Corporate activities -56 -1,240 PE / BV -1.4 0.0
stance, (iv) normalization of credit Capital excess / shortfall -59 -3,572 BV -4.7 0.0
markets behavior, and (v) lower Total AIB -407 1,693 1.2 1.3
than expected RWA growth Source: Company reports and J.P. Morgan estimates.
forecasts derived from more benign
asset quality indicators (vi) better
Table 5: BOI 2010 Valuation (€ mn)
economical environment in Poland
(applies for AIB) 2010E Net profit Valuation Valuation basis Per share (€) P/BV (x)
Retail Ireland -16 2,074 RoE - g/CoE - g 1.9 0.7
BOI life 57 749 RoE - g/CoE - g 0.8 1.9
Capital Markets 340 3,111 RoE - g/CoE - g 3.2 1.0
UK -325 1,921 RoE - g/CoE - g 2.0 0.9
Corporate activities -188 -1,504 PE / BV -1.5 0.0
Capital excess / shortfall 0 -5,676 BV -5.8 0.0
Total BOI -133 676 0.5 0.1
Source: Company reports and J.P. Morgan estimates.

5
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

Three main options to recapitalize Irish


banks – Breaking up the “bad risk”
Since our initiation report, we have been advocating for a widespread recapitalization
of Irish banks as a necessary step to fully restore the sector's health and market
credibility. Having always considered Anglo as a "unique" case, with excessive risk
concentration in UK/Irish CRE markets, smaller size (relative to AIB/BOI), and lack
of a “defensive” retail deposit base, we focus now on BOI and AIB, where solvency
bases have also come under intense market scrutiny, due to the persistently high
pressures surrounding the quality of the lending books, the adverse implications on
earnings generation and risks of negative pro-cyclical impacts from Basel II
implementation.

As mentioned above, we are still focusing our attention on the loan loss provisioning
front, as Irish banks’ key problem is related to their vulnerability to a quickly
deteriorating credit cycle. From an operating perspective, and after frequent
downward revisions in the last 6 months, we are leaving our estimates largely
unchanged in this note, though risks to our low single digit annual average growth in
08-11E remains clearly skewed to the downside, as it basically incorporates: (i) little
or no lending growth in the foreseeable future, with a weaker demand driving a
sustained deleveraging process, (ii) 7-8%annual declines of non interest income
deriving from current market conditions and (iii) more restrictive cost policies with
generally flat expense levels and with banks attempting to offset some of the
inevitable revenue squeeze.

To address the issue of Irish banks’ lending portfolios and the alternatives arising for
their full recapitalization (standard capital injection, loan protection scheme and the
creation of a bad bank), our common approach is derived from the identification of
the most problematic portion of those books, to then assess the magnitude of the final
losses borne by the banks, in line with the analysis done by our UK banks analysts in
a recent note (for more details, see “The way out – Running the Numbers on “Good
Bank - Bad Bank”” dated January 13th). In short, and acknowledging the subjectivity
of our assumptions, we summarize our “bad bank” calculation in two steps:

1. On a first step we have estimated c.16% of BOI’s and 18% of AIB’s total book to
have a higher probability of default, by assigning a bad bank “portion” for every
type of loan by geography. More specifically by segment, we estimate 26-38% of
the CRE book to be “bad" (assuming c.45-50% of the development CRE loans
and c.30% of the investment CRE book to be riskier) and only 6-9% and 7% of
the personal and corporate loan books respectively. By region, we estimate 15%
of the Irish book and 16% of UK book to be considered “bad” for BoI and 19%
and 18% for AIB, for which we also incorporate 10% of the total Polish book.
2. On a second step we have assigned a 75% probability of default (PD) to all those
loans and assumed Loan Given default ratios (LGDs) of 40-45% for investment
CRE loans, 50% for development CRE loans, 50-60% for corporate loans, 30%
for residential loans and a higher 80-90% for consumer loans. Based on these
assumptions, we then calculated the expected losses arising from the “bad bank”
portion of each bank, which derived in accumulated losses representing 5.5% of

6
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

BOI 6.4% of the book for AIB, implying NPL ratios of 12% and 13%
respectively (as a percentage of the overall lending portfolio).
Table 6: Irish banks: Bad bank summary
AIB BOI
Bad Bad PD LGD Expected As % of Bad Bad PD LGD Expected As % of
bank bank (€ (%) (%) loss Total bank bank (€ (%) (%) loss Total
(%) mn) book (%) mn) book
IRELAND
1. Loans to individuals 6% 2,092 75% 50% 777 2.3% 7% 2,206 75% 37% 614 2.0%
o.w. residential mortgages 5% 1,274 75% 30% 287 1.1% 7% 1,945 75% 30% 438 1.6%
o.w. unsecured lending 10% 818 75% 80% 491 6.0% 10% 261 75% 90% 176 6.8%
2. Property & construction 40% 13,204 75% 48% 4,741 14.3% 38% 6,936 75% 48% 2,472 13.4%
o.w. commercial property 36% 7,354 75% 47% 2,603 12.9% 32% 3,398 75% 46% 1,164 10.9%
o.w. Investment 30% 4,128 75% 45% 1,393 10.1% 30% 2,947 75% 45% 995 10.1%
o.w. Development 50% 3,226 75% 50% 1,210 18.8% 50% 451 75% 50% 169 18.8%
o.w. residential property 46% 5,714 75% 49% 2,086 16.8% 46% 3,538 75% 49% 1,308 16.9%
o.w. Investment 30% 749 75% 40% 225 9.0% 30% 485 75% 45% 164 10.1%
o.w. Development 50% 4,965 75% 50% 1,862 18.8% 50% 3,053 75% 50% 1,145 18.8%
o.w. contractors 30% 136 75% 50% 51 11.3% n.a. n.a. n.a. n.a. n.a. n.a.
3. Corporate banking 7% 1,756 75% 50% 659 2.6% 7% 1,358 75% 60% 611 3.2%
TOTAL IRELAND 19% 17,052 75% 48% 6,176 6.7% 15% 10,500 75% 47% 3,697 5.4%
UK
1. Loans to individuals 6% 354 75% 50% 132 2.3% 10% 3,768 75% 40% 1,130 3.0%
o.w. residential mortgages 5% 214 75% 30% 48 1.1% 10% 3,768 75% 40% 1,130 3.0%
o.w. unsecured lending 10% 140 75% 80% 84 6.0% n.a. n.a. n.a. n.a. n.a. n.a.
2. Property & construction 37% 4,810 75% 46% 1,648 12.7% 36% 7,226 75% 48% 2,576 12.9%
o.w. commercial property 34% 2,558 75% 43% 824 10.9% 33% 4,535 75% 46% 1,567 11.3%
o.w. Investment 30% 1,806 75% 40% 542 9.0% 30% 3,574 75% 45% 1,206 10.1%
o.w. Development 50% 752 75% 50% 282 18.8% 50% 961 75% 50% 360 18.8%
o.w. residential property 43% 2,063 75% 49% 754 15.6% 44% 2,690 75% 50% 1,009 16.4%
o.w. Investment 30% 529 75% 45% 178 10.1% 30% 577 75% 50% 216 11.3%
o.w. Development 50% 1,534 75% 50% 575 18.8% 50% 2,114 75% 50% 793 18.8%
o.w. contractors 30% 189 75% 50% 71 11.3% n.a. n.a. n.a. n.a. n.a. n.a.
3. Corporate banking 7% 1,171 75% 50% 443 2.6% 7% 1,435 75% 60% 646 3.2%
TOTAL UK 18% 6,335 75% 47% 2,223 6.3% 16% 12,428 75% 47% 4,351 5.6%
GROUP
1. Loans to individuals 6% 2,669 75% 50% 992 2.4% 9% 5,974 75% 39% 1,744 2.6%
o.w. residential mortgages 5% 1,625 75% 30% 366 1.2% 9% 5,713 75% 37% 1,568 2.4%
o.w. unsecured lending 10% 1,044 75% 80% 626 6.0% 10% 261 75% 90% 176 6.8%
2. Property & construction 38% 18,252 75% 47% 6,471 13.4% 37% 14,161 75% 48% 5,048 13.1%
o.w. commercial property 34% 10,069 75% 46% 3,478 11.9% 32% 7,933 75% 46% 2,730 11.1%
o.w. Investment 29% 6,031 75% 43% 1,964 9.5% 30% 6,522 75% 45% 2,201 10.1%
o.w. Development 47% 4,038 75% 50% 1,514 17.7% 50% 1,412 75% 50% 529 18.8%
o.w. residential property 44% 7,846 75% 49% 2,866 16.0% 45% 6,228 75% 50% 2,317 16.7%
o.w. Investment 30% 1,280 75% 42% 404 9.4% 30% 1,061 75% 48% 380 10.7%
o.w. Development 48% 6,566 75% 50% 2,462 18.0% 50% 5,166 75% 50% 1,937 18.8%
o.w. contractors 28% 336 75% 50% 126 10.6% n.a. n.a. n.a. n.a. n.a. n.a.
3. Corporate banking 7% 3,356 75% 50% 1,263 2.7% 7% 2,792 75% 60% 1,257 3.2%
TOTAL GROUP 18% 24,277 75% 48% 8,726 6.4% 16% 22,928 75% 47% 8,049 5.5%
Source: Company reports and J.P. Morgan estimates.

7
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

With these figures in mind, we have performed three different scenarios we see as
possible under current conditions:

1. Proceed with the recapitalization plan – government’s


announced injection does not look enough
This first option is simply the implementation of the recapitalization measures
announced by the Irish government back in December, where a €2bn preference
share injection was guaranteed for each BOI and AIB, with additional commitment
to underwrite €1bn of ordinary equity if banks were not able to find appetite from
private investors.

How would it be structured, which is the total cost?


With this in mind, we revisit the exercise presented in our note “Irish banks: Funding
just one side of the problem – recapitalizations still necessary” dated October 7th
2008, and calculated the amount of additional capital required to reach a Core Tier 1
ratio of 7% by 2011E, having incorporated our more conservative new earnings
forecasts, still assuming no (cash or scrip) dividend payments over the 2009-11
period and with our RWA forecasts still hovering around 6-11% p.a. That 7% core
figure by 11E implies an equivalent 9.0-9.5% by YE08E.

Excluding any alternative capital management tools (such as potential capital


gains/RWA reduction from the sale of M&T or BZ WBK for AIB or the more recent
decision to run off its UK mortgage portfolio by BOI), we estimate additional capital
needs of c.€3.8bn for BOI and €4.8bn for AIB.

Table 7: AIB-BOI: J.P.Morgan estimated capital need to reach a Core Tier ratio of 7% by 2011E.
2008E 2009E 2010E 2011E 2008E 2009E 2010E 2011E
J.P.Morgan estimated Tier I capital (€mn) 10,626 10,629 10,496 10,517 12,130 12,099 11,691 11,358
J.P.Morgan estimated Core Tier I capital (€mn) 7,536 7,539 7,406 7,427 8,998 8,967 8,559 8,226
J.P.Morgan estimated RWAs (€mn) 122,831 129,805 144,261 160,325 148,048 158,536 175,960 186,245
% yoy growth 5% 6% 11% 11% 10% 7% 11% 6%
Implied Tier 1 ratio 8.7% 8.2% 7.3% 6.6% 8.2% 7.6% 6.6% 6.1%
Implied Core Tier 1 ratio 6.1% 5.8% 5.1% 4.6% 6.1% 5.7% 4.9% 4.4%
Estimated capital needed to reach a Core Tier I ratio of 7% 3,795 3,795 3,795 3,795 4,812 4,812 4,812 4,812
o.w. borne by govt 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000
o.w. borne by shareholders 1,795 1,795 1,795 1,795 2,812 2,812 2,812 2,812
Resulting Tier I capital (€mn) after capital injection 14,421 14,424 14,291 14,313 16,941 16,910 16,503 16,169
Resulting Core Tier I capital (€mn) after capital injection 11,331 11,334 11,201 11,223 13,809 13,778 13,371 13,037
Resulting Tier 1 ratio after capital injection 11.7% 11.1% 9.9% 8.9% 11.4% 10.7% 9.4% 8.7%
Resulting Core Tier 1 ratio after capital injection 9.2% 8.7% 7.8% 7.0% 9.3% 8.7% 7.6% 7.0%
Source: Company reports and J.P. Morgan estimates.

How is the cost split between government and private shareholders and what
are government/shareholders left with?
From those amounts, our central case in this exercise is one where the government
subscribes the announced €2.0bn and ordinary shareholders take up the rest. Note we
have also assumed no discount for newly issued shares vs. current prices given the
stocks’ sharp share declines in the last 12 months, and considered all shares (be it
ordinary or hybrid) as ordinary equity, given the redeemable nature of the
government’s preference shares after a maximum period of 5 years.

8
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

For the government, and having already announced its commitment to provide
banks with capital, this method implies finding private funds willing to share the
financial burden of recapitalizing the two largest Irish banks and then minimize the
financial impact for the taxpayers in the short term, so the result can be described as
reasonably positive. Risks are mainly related to the need to inject additional equity in
an even more protracted credit crisis than that incorporated in our forecasts. Medium
term upside will arise from a potential disposal of its existing stake in the banks.

For shareholders, we see this as the "easiest", but not necessarily the most attractive
option, as (i) implies a substantial injection of capital in the short term, bearing an
enormous dilution for existing holders, (ii) the possibility of additional equity needs
if our forecasts prove too optimistic, (iii) sharing the ownership of the banks with the
government in the foreseeable future, with risks of capping earnings generation and
hence returns, and (iv) risks of delaying the "recovery" scenario, as the full
absorption of credit losses is likely to prove long lasting, especially in the absence of
visibility about the depth of the property downturn. In other words, shareholders
willing to participate in a mixed capital injection with the government must be aware
in our view of the returns of their investment being uncertain and having a long term
nature.

Table 8: AIB-BOI – Continuation of the recapitalization process - Valuation summary


BoI AIB
2008E 2009E 2010E 2011E 2008E 2009E 2010E 2011E
J.P.Morgan current shareholders equity 6,903 6,906 6,773 6,794 9,512 9,481 9,073 8,740
(+) capital injection (€ mn) 3,795 3,795 3,795 3,795 4,812 4,812 4,812 4,812
o.w. borne by govt 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000
o.w. borne by shareholders 1,795 1,795 1,795 1,795 2,812 2,812 2,812 2,812
Existing NOSH (mn) 985 985 985 985 900 900 900 900
NOSH issued (mn) 10,543 10,543 10,543 10,543 16,039 16,039 16,039 16,039
o.w. bought by govt 5,556 5,556 5,556 5,556 6,667 6,667 6,667 6,667
o.w. bought by shareholders 4,987 4,987 4,987 4,987 9,372 9,372 9,372 9,372
Issue price (€) 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.3
current share price (€) 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.3
discount vs. current share price (%) 0% 0% 0% 0% 0% 0% 0% 0%
Resulting NOSH (mn) 11,528 11,528 11,528 11,528 16,939 16,939 16,939 16,939
o.w. owned by govt 5,556 5,556 5,556 5,556 6,667 6,667 6,667 6,667
o.w. owned by shareholders 5,972 5,972 5,972 5,972 10,272 10,272 10,272 10,272
Resulting shareholders' equity (€ mn) 10,698 10,701 10,568 10,590 14,324 14,292 13,885 13,551
Old Tangible BV (€ mn) 6,014 6,017 5,884 5,905 8,886 8,836 8,409 8,055
Resulting Tangible BV (€ mn) 9,809 9,812 9,679 9,701 13,697 13,647 13,220 12,867
Old NAV (€ mn) 4,139 4,132 4,506 5,678 7,698 7,757 7,657 7,342
Resulting NAV (€ mn) 7,934 7,928 8,301 9,474 12,510 12,569 12,469 12,153
BV/share (€) 0.93 0.93 0.92 0.92 0.85 0.84 0.82 0.80
TBV/share (€) 0.85 0.85 0.84 0.84 0.81 0.81 0.78 0.76
NAV/share (€) 0.69 0.69 0.72 0.82 0.74 0.74 0.74 0.72
P/BV (x) 0.39 0.39 0.39 0.39 0.35 0.36 0.37 0.37
PTBV (x) 0.42 0.42 0.43 0.43 0.37 0.37 0.38 0.39
PNAV (x) 0.52 0.52 0.50 0.44 0.41 0.40 0.41 0.42
ROE (%) 6.1% 0.0% -1.3% 0.2% 8.3% -0.2% -2.9% -2.5%
RBTV (%) 6.6% 0.0% -1.4% 0.2% 8.6% -0.2% -3.1% -2.6%
RONAV (%) 8.2% 0.0% -1.6% 0.2% 9.5% -0.2% -3.3% -2.7%
Source: Company reports and J.P. Morgan estimates.

2. Loan insurance scheme – the UK example


A second alternative we believe Irish banks could be presented with comes from
replicating an asset protection scheme like that announced by the UK Treasury

9
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

earlier this week. Note we have assumed assets included in such an initiative would
solely be loans, excluding securities from our analysis at this stage.

How would it be structured, which is the total cost?


• We have included the whole amount of our “bad bank” calculations in the
asset protection scheme (€24.3bn for AIB and €22.9bn for BOI, some 13%
and 11% of their whole balance sheets, respectively). Note our base case
scenario only incorporates loans into the bad bank, as Irish banks have been
reasonably insulated from impairments related to the writedown of
problematic securities.

• We estimate AIB/BOI will assume a first loss piece of 20% of their bad
bank balances, or 2-3% of their overall balance sheet. Note this is higher
than the 8% shown by Bank of America or the 10-12% our UK banks
analysts have assumed, as we take a view about the government trying to
future “hidden” losses and setting up conservative first loss pieces.

• In line with UK’s program, we assume Irish banks will take responsibility
for a 10% residual exposure over and above the first loss piece.

• Lacking any additional details, we have assumed banks will have to pay a
3.4% fee to the government in exchange of their participation in the
protection scheme, in line with that announced by Bank of America.

• As shown in the table, and once we net it of by taxes, total upfront cost for
banks stands at €6.3bn for AIB and €6.0bn for BOI.

Table 9: Irish banks - Total cost under the loan insurance scheme
BOI AIB
Assets included in scheme (€ mn) 22,928 24,277
Fee over assets 3.40% 3.40%
Fee paid by Irish banks (€ mn) 780 825
First loss assumed by Irish banks (€ mn) (1) 4,586 4,855
as % of assets included in scheme 20% 20%
as % of total group assets 2% 3%
Residual Exposure (€ mn) (2) 1,834 1,942
as % of losses exceeding first loss 10% 10%
Maximum losses to be borne irish banks (€ mn) (1+2) 6,420 6,797
Gross cost for Irish banks (fees + maximum losses) 7,199 7,623
Tax Rate 19% 19%
Net cost for Irish banks(€ mn) 6,012 6,331
Source: Company reports and J.P. Morgan estimates.

How big a recapitalization banks would need?


With all these numbers in mind, we estimate a €5.6bn capital injection for AIB and a
€5.4bn for BOI. Key assumptions backing those figures are (i) we have assumed a
20% reduction of RWA, as shareholder will only face a limited amount of losses,
implicitly reducing PD/LGD levels, and (ii) a minimum 7% core Tier 1 ratio going
forward, as management time will still be devoted to clean up the lending portfolio
and there is a risk of final losses being higher than our expectations.

10
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

Table 10: – J.P.Morgan estimated capital needs under the loan insurance scheme
BOI AIB
Pre- Clean up Post Capital Post Pre-clean Clean up Post Capital Post
clean up impact clean up injection injection up impact clean up injection injection
Shareholders' Equity 6,903 -6,012 891 5,354 6,246 9,512 -6,331 3,181 5,624 8,805
Intangibles -889 0 -889 0 -889 -626 0 -626 0 -626
Tangible BV 6,014 -6,012 2 5,354 5,357 8,886 -6,331 2,554 5,624 8,179
Hidden reserves -1000 0 -1,000 0 -1,000 -1188 0 -1,188 0 -1,188
Pension surplus/deficit 0 0 0 0 0 -713 0 -713 0 -713
Excess/shortfall LLP coverage -1,000 0 -1,000 0 -1,000 -475 0 -475 0 -475
NAV 5,014 -6,012 -998 5,354 4,357 7,698 -6,331 1,367 5,624 6,991
Tier 1 capital 10,626 -6,012 4,614 5,354 9,969 12,130 -6,331 5,798 5,624 11,423
Core Tier 1 capital 7,536 -6,012 1,524 5,354 6,879 8,998 -6,331 2,666 5,624 8,291
RWA 122,831 -24,566 98,265 98,265 148,048 -29,610 118,438 118,438
Tier 1 ratio (%) 8.65% 4.70% 10.14% 8.19% 4.90% 9.64%
Core Tier 1 ratio (%) 6.14% 1.55% 7.00% 6.08% 2.25% 7.00%
Source: Company reports and J.P. Morgan estimates.

How is the cost split between government and private shareholders and what is
are government/shareholders left with?
We have assumed the government subscribes €2.0bn of that potential capital
injection, this number being in line with the recapitalization program announced in
December, though we assume the preference capital planned becomes ordinary
shares for accounting purposes (i.e. fully dilutive). For the government, we believe
this system reduces the immediate injection of capital, making it more palatable for
the public opinion, though we also see some additional losses are likely to be borne
by taxpayers in future years, unless the first loss piece set for banks is conservative
enough (around 35% of the bad bank in our estimates), which does not seem a likely
scenario. In our base case scenario, where we expect €8.0-8.5bn of accumulated
losses for AIB/BOI over 08-11E, our assumptions imply banks would only cover the
first €4.5-5.0bn each, leaving the government bearing the remaining c.40-45%.
Long-term upside for the government looks limited to a potential gain on the sale of
its stake, though we would not attach a high likelihood of that happening over the
next 2-3 years.

For shareholders, we estimate the reading is also quite dependent on that first loss
piece, with a 20% figure not appearing as too bad a deal under current circumstances,
as it also limits the amount of capital that needs to be pumped in at this stage (€3.6bn
for AIB and €3.4bn for BOI), and future credit losses are also capped by the
reduction of “tail risks”. We however find two main caveats that temper our
optimism regarding the benefits of such a scheme for existing/new shareholders (i)
we do not believe an asset protection scheme removes the “bad risk” from the bank
shareholders will have to deal with in coming years, delaying the creation of a clean
bank that helps bringing investors’ confidence back, and (ii) if the government
€2.0bn investment assumption proves correct, shareholders will participate in a bank
where public ownership stands at 30-35%, increasing the uncertainty about some
measures devoted to increase overall profitability measures being more difficult to
implement under government's auspices.

11
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

Table 11: Irish banks – Loan insurance scheme – Valuation summary


BOI AIB
Capital injection 5,354 5,624
o.w. borne by government 2,000 2,000
o.w. borne by shareholders 3,354 3,624
Existing NOSH (mn) 985 900
o.w. owned by government 0 0
o.w. owned by shareholders 985 900
NOSH issued (mn) 14,873 8,747
o.w. bought by government 5,556 3110
o.w. bought by shareholders 9,318 5637
issue price (€) 0.36 0.64
current price (€ ) 0.36 0.64
issue vs. current price (%) 0% 0%
Resulting NOSH (mn) 15,858 9,647
o.w. owned by government 5,556 3,110
o.w. owned by shareholders 10,303 6,537
Shareholder's equity 6,246 8,805
Tangible BV 5,357 8,179
NAV 4,357 7,704
BVPS 0.39 0.91
TBVPS 0.33 0.85
NAVS 0.27 0.72
PBV 0.91 0.70
PTBV 1.06 0.76
PNAV 1.31 0.81
Source: Company reports and J.P. Morgan estimates.

3. Good bank/bad bank – the Swedish/Mexican example


The last scenario we explore resembles the measures implemented by the Swedish
government back in 1992, when post a period of substantial credit expansion, market
prices began to decrease and a substantial NPL creation occurred. Ultimately, to
limit the damage, Sweden’s government set up two banks to handle the
nonperforming loans of distressed banks. The “bad” banks ran off assets over a
period of 4 years and were then dissolved. The analysis presented in this note is also
consistent with the exercise done by JP Morgan’s UK banks analysts.

How would such a scenario be structured in Ireland


• We again include the whole amount of our “bad bank” calculations for this
scenario (€24.3bn for AIB and €22.9bn for BOI, some 13% and 11% of their
whole balance sheets, respectively) and assume the government “buys” these bad
portions (via debt issuance), which in turn the clean banks write off from their
books.
• We assume the government acquires that “bad book” with a c.40% discount to
face value. That estimate derives from (i) the accumulated expected losses, which
(as we explained above) we see representing 33%-35% of the total “bad book”
for BOI and AIB by assigning an average 75% PD and c.45-50% LGD, and (ii)
an additional 4-5% haircut which we expect the government will charge for the
assumed risk, the latter being a subjective assumption that tries to address a
higher "bargaining" power on the government's side.
• Thus, as we expose in the table below, we estimate losses of c.€9.2bn for BOI
and €9.7bn for AIB to be written off from existing equity.

12
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

Table 12: Irish banks – Summary of losses under a good bank - bad bank structure
BOI AIB
Group loans 146,401 136,133
Bad bank loans 22,928 24,277
PD 75% 75%
LGD 47% 48%
Implied loss (1) 8,049 8,726
Implied loss over total book (%) 5.5% 6.4%
Implied loss over bad bank book (%) 35% 36%
Government purchase price (haircut vs. par) 40% 40%
Additional loss (%) 5% 4%
Additional loss (€ mn) (2) 1123 985
TOTAL LOSS (1+2) 9,171 9,711
as % of total book 6.3% 7.1%
Source: Company reports and J.P. Morgan estimates.

• In addition, we consider the risk weights that are implied by the bad bank portion.
For this calculation, and maintaining the split by region and segment, we used the
Basel II formulas to determine the asset weighting correspondent to each segment
under the implemented method (standard or advanced IRB) and obtained
weighting of 290% for BoI's total bad bank book and 296% for AIB's. Note these
numbers compare to 300-400% for UK banks (with the difference easily
explained by the implementation of the standard method for some divisions of
Irish banks, which reduces initial saving of capital vs. Basel I, but also mitigates
Basel II pro-cyclical impacts).
Table 13: Irish banks – RWA reduction derived from removing the bad bank
BoI AIB
Bad bank RWAs RWA Bad bank RWAs RWA
€mn (€ mn) Weigthing €mn (€ mn) weigthing
1. Loans to individuals 5,974 19,579 328% 2,669 5,652 212%
o.w. residential mortgages 5,713 19,383 339% 1,625 4,870 300%
o.w. unsecured lending 261 196 75% 1,044 783 75%
2. Property & construction 14,161 34,974 247% 18,252 57,395 314%
o.w. commercial property 7,933 17,922 226% 10,069 31,719 315%
o.w. Investment 6,522 15,121 232% 6,031 17,868 296%
o.w. Development 1,412 2,802 198% 4,038 13,851 343%
o.w. residential property 6,228 17,052 274% 7,846 24,926 318%
o.w. Investment 1,061 2,476 233% 1,280 3,258 254%
o.w. Development 5,166 14,576 282% 6,566 21,668 330%
o.w. contractors 0 0 n.a. 336 750 223%
3. Corporate banking 2,792 11,895 426% 3,356 8,698 259%
TOTAL GROUP 22,928 66,448 290% 24,277 71,746 296%
Source: Company reports and J.P. Morgan estimates.

How big a recapitalization banks would need?


With these numbers in mind, we basically eliminate banks’ existing equity bases
(writing off the 40% estimated discount) and reduce the correspondent risk
weightings of the assets to then estimate the amount of capital the “clean” banks
would need to reach core Tier ratios of 6%. The reasoning behind a lower required
ratio relies on a cleaner balance sheet leading to a more neutral organic capital
generation. Under this scenario, we estimate a €5.3bn capital injection for AIB and a
€5.0bn for BOI.

13
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

Table 14: Irish banks – Capital injections needed under a good bank-bad bank structure
BoI AIB
Pre- Clean up Post Capital Post Pre-clean Clean up Post Capital Post
clean up impact clean up injection injection up impact clean up injection injection
Shareholders' Equity 6,903 -9,171 -2,268 5,018 2,750 9,512 -9,711 -199 5,291 5,092
Intangibles -889 0 -889 0 -889 -626 0 -626 0 -626
Tangible BV 6,014 -9,171 -3,157 5,018 1,861 8,886 -9,711 -825 5,291 4,466
Hidden reserves -1000 1000 0 0 0 -475 475 0 0 0
Pension surplus/deficit 0 0 0 0 0 0 0 0 0 0
Excess/shortfall LLP coverage -1,000 1000 0 0 0 -475 475 0 0 0
NAV 5,014 -8,171 -3,157 5,018 1,861 8,411 -9,236 -825 5,291 4,466
Tier 1 capital 10,626 -9,171 1,455 5,018 6,473 12,130 -9,711 2,419 5,291 7,710
Core Tier 1 capital 7,536 -9,171 -1,635 5,018 3,383 8,998 -9,711 -713 5,291 4,578
RWA 122,831 -66,448 56,383 56,383 148,048 -71,746 76,302 76,302
Tier 1 ratio (%) 8.65% 2.58% 11.48% 8.19% 3.17% 10.10%
Core Tier 1 ratio (%) 6.14% -2.90% 6.00% 6.08% -0.93% 6.00%
Source: Company reports and J.P. Morgan estimates.

How is the cost split between government and private shareholders and what is
are government/shareholders left with?
Unlike the announced recapitalization plan or the asset protection scheme, we
assume the government does not require any immediate capital injection under
the bad bank structure. In such a scheme, the government ends up owning the
problematic loans and their attached funding, probably in exchange of some public
bonds, which are purchased by banks involved in the program at a pre determined
discount (40% in our assumptions). Hence, the plan can be presented to the public as
once where banks' shareholders bear most of the short term losses, with the only
caveat of increased public borrowing levels as bonds are issued. Going forward, the
government will run the bad bank, restructure it, and has the option of selling it back
to investors in the medium term or decide to set up a permanent public bank and use
it as an instrument to achieve a better functioning banking system. Direct benefits for
taxpayers are twofold (i) banks willingness to lend will undoubtedly rise, a key
aspect for a heavily indebted Irish economy, and (ii) a “gain” if final losses stand
below those projected in the haircut assumed by the government/banks in the
separation process.

For shareholders, the short term impact could be seen as negative, as this scheme
will imply a higher capital injection than the other two alternatives we present in this
note (€5.0-5.3bn vs. €1.8-2.8bn), given the absence of government equity involved in
the process, and potentially less favourable conditions than those seen in the asset
protection scheme in terms of the "additional” guarantees required by the
government (i.e. higher haircut). However, in terms of sustainability and proper
functioning of the system (and hence the economy, a good/bad bank structure has
traditionally proved as the most productive alternative in this type of scenario. main
advantages for shareholders can be summarized as follows (i) it increases the chances
of kick-starting investor confidence in Irish banks, as the market perceives entities
have been properly cleaned up, and hence can become investable again, (ii) implies
an indirect derisking of banks’ balance sheets and thus a capital optimization tool, as
highest weighted assets are sold to the government and the good bank can operate
with “old world” core Tier 1 ratios (i.e. our 6% assumption), (iii) frees up
management time to run the clean bank on a “new business" basis, once problematic
loans are removed, and (iv) ownership is 100% private, with no public influence on
how the bank is run. With this, we do not want to imply a good/bad bank program

14
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

would immediately lead to a quick recovery of Irish banks’ growth prospects and
hence returns, but it clearly appears as the best option to accelerate that process.

Table 15: Irish banks – Capital/valuation summary post a good bank-bad bank structure
BOI AIB
Capital injection 5,018 5,291
o.w. borne by government 0 0
o.w. borne by shareholders 5,018 5,291
Existing NOSH (mn) 985 900
NOSH issued (mn) 14338 8229
o.w. bought by government 0 0
o.w. bought by shareholders 14338 8229
issue price (€) 0.35 0.643
current price (€ ) 0.35 0.64
issue vs. current price (%) 0% 0%
Resulting NOSH (mn) 15,323 9,128
o.w. owned by government 0 0
o.w. owned by shareholders 15323 9128
Shareholder's equity 2,750 5,092
Tangible BV 1,861 4,466
NAV 1,861 4,466
BVPS 0.18 0.56
TBVPS 0.12 0.49
NAVS 0.12 0.49
PBV 1.95 1.15
PTBV 2.88 1.31
PNAV 2.88 1.31
Source: Company reports and J.P. Morgan estimates.

15
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

Valuation and recommendation


As we mentioned above, and leaving our operating estimates largely unchanged, we
have adjusted our loan loss provision estimates to reflect the accumulated expected
losses we estimated to result from the bad portions of the balance sheets (€8-8.7bn
for BOI and AIB respectively, representing 6-7% of total 07 lending book). As a
result, and still skewing to the downside, we have cut our estimates and are now
expecting both banks to generate losses by 2010E. As a result of these changes, we
are cutting our SOPT to €1.2 for AIB (vs. previous €3.5) and €0.5 for BOI (from
previous €1.2).

Table 16: Irish banks: Changes in estimates (%)


Bank of Ireland Mar-09E Mar-10E Mar-11E Mar-12E
New Net income estimate 708 3 -133 21
Old Net income estimate 716 98 39 n.a.
% difference -1% -97% -444% n.a.
New diluted EPS (c ) 71.1c 0.3c -13.5c 2.2c
EPS growth (%) -100% -4603% -116%
Old diluted EPS (c ) 71.9c 9.9c 3.9c n.a.

Allied Irish Banks Dec-08E Dec-09E Dec-10E Dec-11E


New Net income estimate 1,184 -31 -407 -334
Old Net income estimate 1,196 306 16 52
% difference -1% -110% -2642% n.a.
New diluted EPS (c ) 124.1c -3.5c -45.5c -36.8c
EPS growth (%) -103% 1196% -19%
Old diluted EPS (c ) 125.5c 34.4c 1.8c n.a.
Source: Company reports and J.P. Morgan estimates.

On this basis, we retain our UW on both AIB and BOI, with our new Dec-09 SOP PT
of €1.2 for AIB (vs. previous €3.5) and €0.5 for BOI (from previous €1.2). We see
high risks of a nationalization and although a properly thought out recapitalization
program, could make us reconsider our stance on BOI and AIB, we see too much
uncertainty at this point.

Risks to our Rating and PT: Upside risks to earnings and PT for both banks are (i)
material improvement of Ireland/UK economic conditions, (ii) softer than expected
correction of Ireland/UK property market, (iii) sizeable easing of ECB’s monetary
stance, (iv) normalization of credit markets behavior, (v) lower than expected RWA
growth forecasts derived from more benign asset quality indicators and (vi) a better
economic environment in Poland (applies for AIB only).

Bank of Ireland (BKIR.I;BKIR ID)


Company Data FYE Mar 2008A 2009E 2009E 2010E 2010E 2011E
Price (€) 0.37 (Old) (New) (Old) (New)
Date Of Price 21 Jan 09 Adj. EPS FY (€) 1.50 0.72 0.71 0.10 0.00 (0.13)
Price Target (€) 0.50 Adj P/E FY 0.2 0.5 0.5 3.7 123.8 NM
Price Target End Date 31 Mar 10 Headline EPS FY (€) 1.75 0.67 0.66 0.10 0.00 (0.13)
52-week Range (€) 11.18 - 0.27 P/NAV FY 0.1 0.1 0.1 0.1 0.1 0.1
Mkt Cap (€ bn) 0.4 P/BV FY 0.1 0.1 0.1 0.1 0.1 0.1
Shares O/S (mn) 995 Dividend (Net) FY (€) 0.641 0.00 0.00 0.00 0.00 0.00
Price Target (€) 0.50 ROE FY 25.5% 9.9% 9.7% 1.4% 0.0% -1.9%
Price Target End Date 31 Mar 10 Tier One Ratio FY 8.1% 8.7% 8.7% 8.1% 8.2% 7.3%
1-IFRS Compliant,Consolidated
Source: Company data, Reuters, J.P. Morgan estimates.

16
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

Allied Irish Banks PLC (ALBK.I;ALBK ID)


Company Data FYE Dec 2007A 2008E 2008E 2009E 2009E 2010E
Price (€) 0.57 (Old) (New) (Old) (New)
Date Of Price 21 Jan 09 Adj. EPS FY (€) 2.10 1.25 1.24 0.34 (0.04) (0.45)
Price Target (€) 1.20 Adj P/E FY 0.3 0.5 0.5 1.7 NM NM
Price Target End Date 01 Dec 09 Headline EPS FY (€) 2.22 1.35 1.34 0.34 (0.04) (0.45)
52-week Range (€) 16.34 - 0.29 P/NAV FY 0.1 0.1 0.1 0.1 0.1 0.1
Mkt Cap (€ bn) 0.5 P/BV FY 0.1 0.1 0.1 0.1 0.1 0.1
Shares O/S (mn) 894 Dividend (Net) FY (€) 0.79 0.30 0.30 0.00 0.00 0.00
ROE FY 22.4% 12.7% 12.6% 3.2% -0.3% -4.4%
Tier One Ratio FY 8.2% 7.5% 7.5% 7.7% 7.7% 8.2%
Source: Company data, Reuters, J.P. Morgan estimates.

17
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

Bank of Ireland: Summary of Financials


Profit and Loss Statement Ratio Analysis
€ in millions, year end Mar FY07A FY08A FY09E FY10E FY11E € in millions, year end Mar FY07A FY08A FY09E FY10E FY11E
Per Share Data
Net interest income 2,757 3,263 3,640 3,553 3,687 EPS Reported 1.72 1.75 0.66 0.00 -0.13
% Change Y/Y 19.5% 18.4% 11.5% (2.4%) 3.8% EPS Adjusted 1.44 1.50 0.71 0.00 (0.13)
Non-interest income 1,114 -168 -304 -82 24 % Change Y/Y 23.9% 4.6% (52.7%) (99.6%) (4,602.8%)
Fees & commissions - - - - - DPS 0.60 0.64 0.00 0.00 0.00
% change Y/Y - - - - - % Change Y/Y 15.0% 5.3% (100.0%) - -
Trading revenues - - - - - Dividend yield 5.3% 4.4% 6.5% 0.0% 0.0%
% change Y/Y - - - - - Payout ratio 35.1% 36.4% 0.0% 0.0% -0.0%
Other Income 349 1,227 664 654 623 BV per share 7.08 6.72 7.01 7.01 6.88
Total operating revenues 4,220 4,322 4,001 4,125 4,334 NAV per share 5.38 4.84 4.20 4.20 4.57
% change Y/Y 13.4% 2.4% (7.4%) 3.1% 5.1% Shares outstanding 950.0 965.0 985.0 985.0 985.0
Admin expenses -2,159 -2,156 -2,106 -2,006 -2,054
% change Y/Y 6.9% (0.1%) (2.3%) (4.8%) 2.4% Return ratios
Other expenses - - - - - RoRWA 1.5% 1.6% 1.5% 0.5% 0.0%
Pre-provision operating profit 2,017 2,120 1,895 2,089 2,246 Pre-tax ROE 32.5% 29.3% 11.3% 0.4% (2.0%)
% change Y/Y 21.7% 5.1% (10.6%) 10.3% 7.5% ROE 27.1% 25.5% 9.7% 0.0% (1.9%)
Loan loss provisions -103 -232 -1,137 -2,091 -2,419 RoNAV 31.2% 30.4% 15.9% 0.1% (3.1%)
Other provisions - - - - -
Earnings before tax 1,958 1,934 758 28 -138 Revenues
% change Y/Y 22.5% (1.2%) (60.8%) (96.3%) (590.5%) NIM (NII / RWA) 2.8% 2.9% 3.1% 2.9% 2.8%
Tax (charge) (306) (229) (106) (5) 26 Non-IR / average assets 1.0% 0.9% 0.5% 0.2% 0.3%
% Tax rate 15.6% 11.8% 14.0% 18.5% 18.5% Total rev / average assets 2.7% 2.6% 2.2% 2.0% 1.9%
Minorities (1) (5) 15 (5) (5) NII / Total revenues 66.0% 76.3% 91.0% 86.8% 85.8%
Net Income (Reported) 1,636 1,686 652 3 (133) Fees / Total revenues - - - - -
Trading / Total revenues - - - - -

Balance sheet
€ in millions, year end Mar FY07A FY08A FY09E FY10E FY11E € in millions, year end Mar FY07A FY08A FY09E FY10E FY11E

ASSETS Cost ratios


Net customer loans 125,048 135,738 148,407 144,592 148,547 Cost / income 54.9% 51.7% 50.4% 52.6% 49.0%
% change Y/Y 23.5% 8.5% 9.3% (2.6%) 2.7% Cost / assets 1.1% 1.1% 1.0% 1.0% 0.9%
Loan loss reserves 428 601 1,269 2,770 4,466 Staff numbers 15,952 15,952 15,952 15,952 15,952
Investments 46,676 40,335 40,013 40,236 40,463
Other interest earning assets 10,158 14,075 14,068 14,576 15,196 Balance Sheet Gearing
% change Y/Y (20.4%) 38.6% (0.0%) 3.6% 4.3% Loan / deposit 129.4% 173.0% 157.4% 151.2% 137.8%
Average interest earnings assets 135,206 149,813 162,475 159,168 163,743 Investments / assets 24.7% 20.4% 19.0% 18.4% 17.9%
Goodwill 347 293 319 319 319 Loan / assets 66.2% 68.8% 70.4% 66.2% 65.7%
Other assets 5,400 5,816 5,545 16,208 19,144 Customer deposits / liabilities 39.7% 45.2% 48.1% 49.6% 50.6%
Total assets 188,813 197,434 210,774 218,422 226,232 LT Debt / liabilities 42.3% 41.2% 38.3% 37.2% 36.4%

LIABILITIES Asset Quality / Capital


Customer deposits 72,277 86,234 98,133 104,905 111,310 Loan loss reserves / loans 0.3% 0.4% 0.9% 1.9% 3.0%
% change Y/Y 17.1% 19.3% 13.8% 6.9% 6.1% NPLs / loans 0.5% 0.8% 2.2% 3.7% 4.8%
Long term funding 77,002 78,634 78,118 78,727 79,956 LLP / RWA 0.11% 0.20% 0.97% 1.70% 1.86%
Interbank funding 20,648 14,384 16,504 16,666 16,830 Loan loss reserves / NPLs 63.1% 56.6% 39.8% 52.5% 64.5%
Average interest bearing liabs 64,303 77,818 78,376 78,422 79,341 Growth in NPLs (14.7%) 56.4% 200.6% 65.4% 31.2%
Other liabilities 11,538 10,853 10,247 10,553 10,869 RWAs 97,510 112,940 116,961 122,831 129,805
Retirement benefit liabilities 590 807 831 856 882 % YoY change 28.5% 15.8% 3.6% 5.0% 5.7%
Shareholders' equity 6,758 6,522 6,941 6,716 6,386 Core Tier 1 - - - - -
Minorities 34 38 38 38 38 Total Tier 1 7.9% 8.1% 8.7% 8.2% 7.3%
Total liabilities & Shareholders Equity 188,813 197,434 210,774 218,422 226,232

Source: Company reports and J.P. Morgan estimates.

18
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

All Data As Of 22-Jan-09

Q-Snapshot: Bank of Ireland Ord Stk EUR0.64


Quant Return Drivers (a Score >50% indicates company ranks 'above average') J.P. Morgan Composite Q-Score
Score 0% (worst) to 100% (best) vs Country vs Industry Raw Value
100% HIGH/STRONGER
Value
P/E Vs Market (12mth fwd EPS) 90% 92% 0.4x C
75%
P/E Vs Sector (12mth fwd EPS) 54% 56% 1.0x O
EPS Growth (forecast) 8% 1% -50.0% U
50%
Value Score 50% 36% N
Price Momentum T
25%
12 Month Price Momentum 5% 1% -95.7% R
1 Month Price Reversion 94% 99% -45.2% Y 0% LOW/WEAKER
Momentum Score 11% 13%
0% 25% 50% 75% 100%
Quality
Return On Equity (forecast) 21% 47% 10.5% INDUSTRY
Earnings Risk (Variation in Consensus) 0% 0% 4.51 Quant Return Drivers Summary (vs Industry)
Quality Score 5% 5%
100%
Earnings & Sentiment
Earnings Momentum 3mth (risk adjusted) 84% 76% -8.4 75%
1 Mth Change in Avg Recom. 30% 65% 0.01 50%
Net Revisions FY2 EPS 57% 48% -67% 25%
Earnings & Sentiment Score 61% 63%
0%
COMPOSITE Q-SCORE* (0% To 100%) 10% 11% VALUE PRICE QUALITY EARNINGS

Targets & Recommendations** EPS Revisions** EPS Momentum (%) Historical Total Return (%)
20 Targets Recoms 14 0.0 0
Consensus Changes (4wks)
Consensus Changes (4wks)

12 -10.0

(Local Currency %)
-20
15 10 -20.0
-40
8 -30.0
(%)

10 -60 -45
6 -40.0
5 4 -50.0 -80
2 -60.0 -100 -81
0 -96 -97
0 -70.0 -120
Up Dn Unchanged Up Dn Unchanged -1 Mth -3 Mth 1Mth 3Mth 1Yr 3Yr
FY1 FY2 FY1 FY2
Consensus Growth Outlook (%)
10.0 1.3
0.0
-10.0
-20.0
-30.0
-40.0
-50.0 -38.1
-60.0 -50.0 -50.0 -50.0
EPS Actual To FY1 EPS FY1 To FY2 EPS FY2 To FY3 Dividends FY1 To FY2 Sales FY1ToFY2

Closest in Industry by Size (Consensus. ADV = average daily value traded in US$m over the last 3 mths)
Code Name Country USD MCAP ADV PE FY1 Q-Score*
SAB-ES Banco de Sabadell S.A. Spain 6,780 33.74 7.4 56%
BTO-ES Banco Espanol de Credito S.A. Spain 6,185 6.61 6.6 48%
BCP-PT Banco Comercial Portugues S/A Portugal 4,697 14.38 7.6 38%
BES-PT Banco Espirito Santo S/A Portugal 3,718 10.31 5.8 49%
BP-IT Banco Popolare S.C. Italy 3,651 44.11 3.7 28%
BKT-ES Bankinter S.A. Spain 3,206 14.47 9.8 39%
PMI-IT Banca Popolare di Milano S.C.A.R.L. Italy 2,102 19.30 7.2 16%
SWED.A-SE Swedbank AB Sweden 1,862 65.47 1.7 47%
PAS-ES Banco Pastor S.A. Spain 1,730 1.58 6.8 34%
BIR-IE Bank of Ireland Ord Stk EUR0.64 Ireland 532 18.42 0.5 11%
AIB-IE Allied Irish Banks PLC Ireland 526 25.97 0.4 12%

Source: Factset, Thomson and J.P. Morgan Quantitative Research. For an explanation of the Q-Snapshot, please visit http://jpmorgan.hk.acrobat.com/qsnapshot/
Q-Snapshots are a product of J.P. Morgan’s Global Quantitative Analysis team and provide quantitative metrics summarized in an overall company 'Q-Score.'
Q-Snapshots are based on consensus data and should not be considered as having a direct relationship with the J.P. Morgan analysts’ recommendation.
* The Composite Q-Score is calculated by weighting and combining the 10 Quant return drivers shown. The higher the Q-Score the higher the one month
expected return. On a 14 Year back-test the stocks with the highest Q-Scores have been shown (on average) to significantly outperform those stocks with the
lowest Q-Scores in this universe. ** The number of up, down and unchanged target prices, recommendations or EPS forecasts that make up consensus.

19
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

Allied Irish Banks PLC: Summary of Financials


Profit and Loss Statement Ratio Analysis
€ in millions, year end Dec FY06A FY07A FY08E FY09E FY10E € in millions, year end Dec FY06A FY07A FY08E FY09E FY10E
Per Share Data
Net interest income 2,999 3,418 3,732 3,622 3,666 EPS Reported 2.51 2.22 1.34 -0.04 -0.45
% Change Y/Y 18.5% 14.0% 9.2% (2.9%) 1.2% EPSA djusted 1.87 2.10 1.24 (0.04) (0.45)
Non-interest income 1,327 1,450 1,145 1,084 1,076 % Change Y/Y 25.3% 12.4% (41.0%) (102.8%) 1,196.1%
Fees & commissions - - - - - DPS 0.72 0.79 0.30 0.00 0.00
% change Y/Y - - - - - % Change Y/Y 10.0% 10.0% (61.9%) (100.0%) -
Trading revenues - - - - - Dividend yield 3.3% 5.2% 46.8% 0.0% 0.0%
% change Y/Y - - - - - Payout ratio 28.6% 35.5% 22.5% -0.0% -0.0%
Other Income - - - - - BV per share 9.14 10.46 10.57 10.46 9.94
Total operating revenues 4,326 4,868 4,877 4,706 4,742 NAV per share 7.16 9.20 8.56 8.56 8.39
% change Y/Y 18.6% 12.5% 0.2% (3.5%) 0.8% Shares outstanding 887.5 892.3 899.7 906.3 912.9
Admin expenses -2,314 -2,521 -2,487 -2,385 -2,416
% change Y/Y 15.1% 8.9% (1.4%) (4.1%) 1.3% Return ratios
Other expenses - - - - - RoRWA 1.9% 1.5% 0.9% (0.0%) (0.3%)
Pre-provision operating profit 2,012 2,347 2,391 2,321 2,326 Pre-tax ROE 34.2% 28.8% 17.2% 1.4% (3.4%)
% change Y/Y 23.0% 16.7% 1.9% (2.9%) 0.2% ROE 28.6% 22.4% 12.6% (0.3%) (4.4%)
Loan loss provisions -118 -106 -997 -2,303 -2,760 RoNAV 25.8% 25.3% 13.8% (0.4%) (5.3%)
Other provisions 14 7 -6 -2 -2
Earnings before tax 2,615 2,508 1,620 136 -311 Revenues
% change Y/Y 53.3% (4.1%) (35.4%) (91.6%) (328.1%) NIM (NII / RWA) 2.4% 2.5% 2.8% 2.4% 2.3%
Tax (charge) (433) (442) (308) (26) 59 Non-IR / average assets 0.9% 0.9% 0.6% 0.6% 0.6%
% Tax rate 16.6% 17.6% 19.0% 19.0% 19.0% Total rev / average assets 3.0% 2.9% 2.7% 2.5% 2.6%
Minorities 3 (117) (129) (142) (156) NII / Total revenues 69.3% 70.2% 76.5% 77.0% 77.3%
Net Income (Reported) 2,185 1,949 1,184 (31) (407) Fees / Total revenues - - - - -
Trading / Total revenues - - - - -

Balance sheet
€ in millions, year end Dec FY06A FY07A FY08E FY09E FY10E € in millions, year end Dec FY06A FY07A FY08E FY09E FY10E

ASSETS Cost ratios


Net customer loans 107,115 127,603 136,134 131,607 133,476 Cost / income 53.5% 51.8% 51.0% 50.7% 50.9%
% change Y/Y 25.7% 19.1% 6.7% (3.3%) 1.4% Cost / assets 1.5% 1.4% 1.3% 1.3% 1.3%
Loan loss reserves 707 744 1,582 2,925 4,506 Staff numbers 24,085 25,898 25,898 25,898 25,898
Investments 28,618 29,225 29,571 29,571 29,571
Other interest earning assets 17,582 15,704 16,038 16,383 16,738 Balance Sheet Gearing
% change Y/Y 56.6% (10.7%) 2.1% 2.1% 2.2% Loan / deposit 143.1% 156.9% 149.3% 142.9% 136.5%
Average interest earnings assets - - - - - Investments / assets 18.1% 16.4% 15.8% 16.1% 15.9%
Goodwill 550 636 636 636 636 Loan / assets 67.6% 71.7% 72.6% 71.7% 71.8%
Other assets 2,949 3,032 3,116 3,202 3,291 Customer deposits / liabilities 50.4% 48.8% 52.0% 53.7% 56.1%
Total assets 158,526 177,862 187,401 183,427 185,901 LT Debt / liabilities 24.2% 30.5% 28.3% 26.5% 24.3%

LIABILITIES Asset Quality / Capital


Customer deposits 74,875 81,308 91,168 92,084 97,803 Loan loss reserves / loans 0.7% 0.6% 1.2% 2.2% 3.4%
% change Y/Y 19.6% 8.6% 12.1% 1.0% 6.2% NPLs / loans 0.9% 0.8% 1.9% 3.1% 4.2%
Long term funding 35,997 50,807 49,663 45,420 42,387 LLP / RWA 0.57% 0.53% 1.18% 1.98% 2.84%
Interbank funding 33,433 30,389 30,389 31,301 32,240 Loan loss reserves / NPLs 75.8% 70.9% 61.3% 71.1% 79.5%
Average interest bearing liabs - - - - - Growth in NPLs 7.5% 12.4% 146.1% 59.5% 37.6%
Other liabilities 3,372 3,757 3,722 2,180 1,425 RWAs 123,034 139,386 134,091 148,048 158,536
Retirement benefit liabilities 937 423 436 449 462 % YoY change 21.0% 13.3% (3.8%) 10.4% 7.1%
Shareholders' equity - - - - - Core Tier 1 - - - - -
Minorities 1,307 1,351 1,395 1,395 1,395 Total Tier 1 0.6% 8.2% 7.5% 7.7% 8.2%
Total liabilities & Shareholders Equity 158,526 177,862 187,401 183,427 185,901

Source: Company reports and J.P. Morgan estimates.

20
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

All Data As Of 22-Jan-09

Q-Snapshot: Allied Irish Banks PLC


Quant Return Drivers (a Score >50% indicates company ranks 'above average') J.P. Morgan Composite Q-Score
Score 0% (worst) to 100% (best) vs Country vs Industry Raw Value
100% HIGH/STRONGER
Value
P/E Vs Market (12mth fwd EPS) 90% 92% 0.4x C
75%
P/E Vs Sector (12mth fwd EPS) 54% 56% 1.0x O
EPS Growth (forecast) 14% 6% -40.7% U
50%
Value Score 61% 48% N
Price Momentum T
25%
12 Month Price Momentum 5% 1% -95.7% R
1 Month Price Reversion 99% 99% -65.5% Y 0% LOW/WEAKER
Momentum Score 19% 15%
0% 25% 50% 75% 100%
Quality
Return On Equity (forecast) 26% 57% 12.5% INDUSTRY
Earnings Risk (Variation in Consensus) 12% 0% 1.38 Quant Return Drivers Summary (vs Industry)
Quality Score 13% 6%
100%
Earnings & Sentiment
Earnings Momentum 3mth (risk adjusted) 80% 71% -12.2 75%
1 Mth Change in Avg Recom. 28% 58% -0.01 50%
Net Revisions FY2 EPS 42% 16% -100% 25%
Earnings & Sentiment Score 45% 49%
0%
COMPOSITE Q-SCORE* (0% To 100%) 20% 12% VALUE PRICE QUALITY EARNINGS

Targets & Recommendations** EPS Revisions** EPS Momentum (%) Historical Total Return (%)
20 Targets Recoms 20 0.0 0
Consensus Changes (4wks)
Consensus Changes (4wks)

-5.0

(Local Currency %)
-20
15 15
-10.0 -40
(%)

10 10 -15.0 -60
-20.0 -80 -65
5 5
-25.0 -100 -85
0 -96 -96
0 -30.0 -120
Up Dn Unchanged Up Dn Unchanged -1 Mth -3 Mth 1Mth 3Mth 1Yr 3Yr
FY1 FY2 FY1 FY2
Consensus Growth Outlook (%)
60.0 50.0
40.0
20.0 0.6
0.0
-20.0
-40.0
-31.5
-60.0 -50.0 -50.0
EPS Actual To FY1 EPS FY1 To FY2 EPS FY2 To FY3 Dividends FY1 To FY2 Sales FY1ToFY2

Closest in Industry by Size (Consensus. ADV = average daily value traded in US$m over the last 3 mths)
Code Name Country USD MCAP ADV PE FY1 Q-Score*
SAB-ES Banco de Sabadell S.A. Spain 6,780 33.74 7.4 56%
BTO-ES Banco Espanol de Credito S.A. Spain 6,185 6.61 6.6 48%
BCP-PT Banco Comercial Portugues S/A Portugal 4,697 14.38 7.6 38%
BES-PT Banco Espirito Santo S/A Portugal 3,718 10.31 5.8 49%
BP-IT Banco Popolare S.C. Italy 3,651 44.11 3.7 28%
BKT-ES Bankinter S.A. Spain 3,206 14.47 9.8 39%
PMI-IT Banca Popolare di Milano S.C.A.R.L. Italy 2,102 19.30 7.2 16%
SWED.A-SE Swedbank AB Sweden 1,862 65.47 1.7 47%
PAS-ES Banco Pastor S.A. Spain 1,730 1.58 6.8 34%
BIR-IE Bank of Ireland Ord Stk EUR0.64 Ireland 532 18.42 0.5 11%
AIB-IE Allied Irish Banks PLC Ireland 526 25.97 0.4 12%

Source: Factset, Thomson and J.P. Morgan Quantitative Research. For an explanation of the Q-Snapshot, please visit http://jpmorgan.hk.acrobat.com/qsnapshot/
Q-Snapshots are a product of J.P. Morgan’s Global Quantitative Analysis team and provide quantitative metrics summarized in an overall company 'Q-Score.'
Q-Snapshots are based on consensus data and should not be considered as having a direct relationship with the J.P. Morgan analysts’ recommendation.
* The Composite Q-Score is calculated by weighting and combining the 10 Quant return drivers shown. The higher the Q-Score the higher the one month
expected return. On a 14 Year back-test the stocks with the highest Q-Scores have been shown (on average) to significantly outperform those stocks with the
lowest Q-Scores in this universe. ** The number of up, down and unchanged target prices, recommendations or EPS forecasts that make up consensus.

21
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

Analyst Certification:
The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily
responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with
respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report
accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the
research analyst(s) in this report.
Important Disclosures

• Market Maker/ Liquidity Provider: JPMSL and/or an affiliate is a market maker and/or liquidity provider in Allied Irish Banks
PLC, Bank of Ireland.
• Lead or Co-manager: JPMSI or its affiliates acted as lead or co-manager in a public offering of equity and/or debt securities for
Allied Irish Banks PLC, Bank of Ireland within the past 12 months.
• Client of the Firm: Allied Irish Banks PLC is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI
provided to the company investment banking services, non-investment banking securities-related service and non-securities-related
services. Bank of Ireland is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the
company investment banking services, non-investment banking securities-related service and non-securities-related services.
• Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking
services from Allied Irish Banks PLC, Bank of Ireland.
• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment
banking services in the next three months from Allied Irish Banks PLC, Bank of Ireland.
• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other
than investment banking from Allied Irish Banks PLC, Bank of Ireland. An affiliate of JPMSI has received compensation in the past
12 months for products or services other than investment banking from Allied Irish Banks PLC, Bank of Ireland.

Allied Irish Banks PLC (ALBK.I) Price Chart

Date Rating Share Price Price Target


44
UW €3.5 (€) (€)
10-Sep-08 UW 8.75 8.50
UW €5.5 06-Oct-08 UW 7.50 5.50
33
06-Nov-08 UW 4.30 3.50

UW €8.5
Price(€)
22

11

0
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan
06 06 06 06 07 07 07 07 08 08 08 08 09

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.
Break in coverage Jun 27, 2005 - Sep 10, 2008. This chart shows J.P. Morgan's continuing coverage of this stock; the
current analyst may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

22
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

Bank of Ireland (BKIR.I) Price Chart

36 Date Rating Share Price Price Target


UW €1 (€) (€)
10-Sep-08 UW 5.90 4.30
27 UW €2.7 17-Sep-08 UW 4.62 2.70
17-Nov-08 UW 0.83 1.00

UW €4.3
Price(€) 18

0
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan
06 06 06 06 07 07 07 07 08 08 08 08 09

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.
Break in coverage Jun 27, 2005 - Sep 10, 2008. This chart shows J.P. Morgan's continuing coverage of this stock; the
current analyst may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:


J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector
and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Ignacio Cerezo: Allied Irish Banks PLC (ALBK.I), Anglo Irish Bank (ANGL.I), BBVA (BBVA.MC),
BPI (BBPI.LS), Banco Comercial Português (BCP.LS), Banco Espirito Santo (BES.LS), Banco Pastor (PAS.MC), Banco
Popular (POP.MC), Banco Sabadell (SABE.MC), Banesto (BTO.MC), Bank of Ireland (BKIR.I), Bankinter (BKT.MC),
Criteria Caixa Corp (CRIT.MC), Santander (SAN.MC)

J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2008


Overweight Neutral Underweight
(buy) (hold) (sell)
JPM Global Equity Research Coverage 38% 44% 18%
IB clients* 54% 52% 43%
JPMSI Equity Research Coverage 37% 49% 14%
IB clients* 76% 71% 62%
*Percentage of investment banking clients in each rating category.
For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on
any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on
the front of this note or your J.P. Morgan representative.

Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon
various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which
include revenues from, among other business units, Institutional Equities and Investment Banking.

23
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

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24
Ignacio Cerezo Europe Equity Research
(44-20) 7325-4425 23 January 2009
ignacio.cerezo@jpmorgan.com
Andrea Unzueta
(44-20) 7325-7454
andrea.e.unzueta@jpmorgan.com

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