In August 2011, Wilbur Ross (YC '59), an American investor whose firm, WL Ross & Co LLC, specialized in distressed and bankrupt companies, was part of a group that raised $1.6 billion to purchase 35% of the stock of Bank of Ireland. Even for Ross, known for his ability to find value in properties that other investors had shunned, investing in an Irish bank seemed risky. Observers wondered if the investment made sense.
Ireland had been dubbed the Celtic Tiger for its rapid growth in the late 1990s and early 2000s, but it had experienced a massive contraction beginning in 2008. Most observers posit that the country's problems were a result of the collapse of real estate prices following an overheated market. After fifteen years of steady increase in the index of house prices, prices began to decline and then collapse. Just as the banks needed additional capital reserves, the worldwide financial crisis dried up the foreign capital that had supported the lending frenzy. Ireland's banks teetered on the edge of failure.
Stabilizing the banks required a succession of government interventions. In September 2008, the Irish government guaranteed 375 billion euro of bank deposits and bonds for indigenous Irish banks, "the covered banks." By April 2009, real-estate values continued to plummet and bad news and questionable banking practices shared the headlines. The government created NAMA, which took on 90 billion euro of performing and non-performing real estate loans from the covered banks at heavy discounts, in exchange for NAMA bonds.
In addition to its direct impact on the banks, the global economic collapse curtailed outside investment in Ireland, cutting government revenues and increasing government spending for social welfare. All these factors, particularly the bank debt, which was now government debt, pushed the country toward economic collapse. As a user of the euro, Ireland could not devalue its currencies to reduce its debt, as struggling economies had done in the past. To head off collapse, it required a bailout from the European Union and IMF, supported by the ECB (The Troika).
By the end of 2010, the European Union was threatened with problems in Ireland, Greece, and Spain. Some observers predicted a collapse of the euro and possible dis-union. The International Monetary Fund, the European Central Bank, and the European Commission, referred to as the troika, announced a bailout package of 85 billion euros (67.5 billion euros from external sources, and 17.5 billion euros pulled from Irish government reserves) to support the Irish Government. The loans required the government to take stringent steps, raising government taxes and fees, cutting government spending, and supporting the re-capitalization of the remaining covered banks (two covered banks had already been nationalized).
In spite of the daunting pressures on Ireland and its banks, Wilbur Ross saw opportunity. He and his team had banking experience and a solid belief in the long-run success of Ireland. His firm saw an investment in an Irish bank as a good proxy for a bet on the country's recovery. WL Ross attempted in 2010 to take on a small bank in Ireland, but at the last minute the government decided on to nationalize it rather than seek an outside investor. In 2011, the rights offering at Bank of Ireland presented an opportunity to place his bet on the country's long-term future.
By the end of 2013 Bank of Ireland was close to profitability. The Bank had returned cash of 5.9 billion euro to the State for its 4.8 billion euro investment. The State still held 15% of the Bank, and that 15% was worth approximately 1.3 billion euro. The Exceptional Guarantee of deposits and bonds had been lifted, so the Irish taxpayers were well in the money on their support for and investment in Bank of Ireland. Ireland was exiting the Troika programme and Bank of Ireland’s share price had increased 260% from the 2011 rights issue price.
But in spite of the bank's good news through 2013, problems remained that could still derail the investment. Macroeconomic issues were not resolved. Europe had not yet recovered from the financial crisis, and a number of peripheral countries in the euro continued to struggle. Even though foreign investment had begun to pick up, the Irish economy was recovering more slowly than had been expected. The public press continued to deride the bank management, particularly CEO Richie Boucher. The government's ability to regulate Bank of Ireland, the country's only major non-nationalized bank, created a risk that the level playing field could tilt if public pressure over fees and profits became too extreme. And the bank had to be well managed, increasing revenues and increasing efficiencies as it dealt with Ireland's less than certain future.
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Jean W. Rosenthal, Eamonn Walsh , Matt Spiegel, Will Goetzmann, David Bach, Damien P. McLoughlin, Fernando Fernández, Gayle Allard, and Jaan Elias, “Bank of Ireland,” Global Network for Advanced Management Case 103-13, January 09, 2014.
- Financial Crisis
- Private Equity
- Asset Management
- Financial Regulation
- Leadership & Teamwork
- State & Society
The Yale School of Management’s work on this Global Network case study has been made possible by the generous support of The Brad Huang ’90 Fund for Innovation in Case Studies