Fairfax says Bank of Ireland investment solid despite country’s financial woes

TORONTO – The purchase of a nine per cent stake in Ireland’s last private bank by Fairfax Financial Holdings Ltd. is “just a regular insurance investment” but one the investment company found very attractive despite economic troubles in the country, Fairfax CEO Prem Watsa told investors Friday.

“We liked Ireland, we’ve been there for 20 years, we like The Bank of Ireland as the best bank in Ireland, the only private one, a full-service bank with 250 branches,” Watsa said on a conference call with financial analysts.

Watsa noted that while the acquisition received publicity due to its taking place in Ireland, where financial conditions have deteriorated sharply over the last several years, The Bank of Ireland has survived with solid fundamentals.

“Their capital position is very strong – Tier 1 capital is at 15 per cent, core equity capital is 10 per cent and the central bank of Ireland has very significant, very tough stress tests,” Watsa said, adding that it was notable the bank survived the tests despite a 60 per cent drop in housing prices and a 70 per cent drop in commercial property prices.

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Fairfax (TSX:FFH) has not disclosed its exact investment in the private bank. It joined Capital Research, Fidelity Investments, investment maverick Wilbur Ross and real estate investment firm Kennedy Wilson in making a euro1.12-billion investment. Though the companies all invested separately and not as part of a bloc, their combined stakes add up to about 34.9 per cent of the bank.

The Irish government is expected to maintain an interest of between 15 and 31 per cent in The Bank of Ireland, with the rest of the bank remaining in private hands. Fairfax has successfully invested in a failed bank before, spending $388 million to acquire a piece of Wells Fargo in 2008. That stake currently has a market value of more than $600 million.

The sale of at least 68 per cent of the 229-year-old bank to private shareholders keeps it out of the government’s control, unlike the country’s other banks.

Ireland’s banks were hit hard three years ago as the country was one of the first in Europe to face the recession. After years of lending to property developers, those developers were unable to repay their loans, leaving the banks in need of bailouts.

The crisis overwhelmed Ireland’s finances, costing the country an estimated euro65 billion and leading it to accept bailout money from the European Union and the International Monetary Fund.

In March, stress tests disclosed that the Bank of Ireland needed a euro5.2-billion bailout to stay afloat. Observers had predicted the government would ultimately take ownership of the bank, the last one it did not already own.

On Thursday, Fairfax reported a big increase in second-quarter profit on gains in its investment portfolio.

The company, which reports in U.S. dollars, said it earned US$83.3 million or $3.40 per diluted share in the quarter. That compared with net earnings of US$23.7 million or 87 cents per diluted share in the same 2010 period. Revenue for the three months ended June 30 was US$1.75 billion, up from US$1.39 billion.

Net premiums written by the company in the second quarter of 2011 increased 24.3 per cent to US$1.37 billion from US$1.1 billion in the second quarter of 2010, due primarily to the acquisitions of Zenith National and First Mercury.

Shares in Fairfax rose $6.67 or 1.8 per cent to trade at $376.70 Friday on the TSX.