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Bank of Ireland (ADR) (IRE), Orange SA (ADR) (ORAN): Is It Time to Trust Europe Again?

It maybe too early to call it just yet but initial indications seem to suggest that the euro zone is actually on the road to recovery. I make this statement after a flood of good information from the euro zone over the past few days. The Markit ‘flash’ estimate of its composite purchasing managers index for July rose to 50.4 from 48.9 in June – a reading over 50 signals expansion. This reading also highlights the fact that the euro zone is to some extent immune from the slowdown in China, where similar data showed manufacturing activity dropped to an 11-month low.

There is also good news coming out of Ireland, where the collapsing property market has shown signs of stabilizing and, for the first time since the property crash, property prices throughout the country have started to tick higher.

Additionally, the UK economy grew 0.6% for the second quarter and the Spanish economy only shrank 0.1%, lower than the 0.5% decline in the first quarter. Moreover, Spanish exports rose 7.3% and unemployment fell from 27.2% in the first quarter to 26.3% at the end of the second quarter, still high but signs of improvement are showing through. Elsewhere, tourism revenue has started to expand in Greece after a year of contraction throughout 2012.

So, could it be time to take on some risk in Europe.


Investors are slowly returning to the Irish economy and a good play for this trend would be bailed-out Bank of Ireland (ADR) (NYSE:IRE). Indeed, it would appear as if investors are already showing their support, as the bank recently issued $650 million of unsecured three-year debt for a rate of 2.7%, almost half the rate that it had to pay after its state bailout. Moreover, this rate is less than some US banks are being asked to pay.

Bank of Ireland (ADR) (NYSE:IRE)The banks balance sheet is also showing signs of strength. The loan-to-deposit ratio fell below 130% at the end of 2012, down from 175% at the end of 2010 and Tier one capital ratio stands at 14%, which is higher than that of banking giant Wells Fargo, which has a Tier one ratio of 12.1%. In addition, during 2012 the banks net interest margin grew by 14 bps to 1.3% in a general low interest rate environment.

However, while Bank of Ireland (ADR) (NYSE:IRE) is becoming stronger, it would appear that this is at the expense of its customers, who are leaving in droves to find better interest rates as the bank tries to drag itself back to health. Still, as one of the country’s biggest banks this is unlikely to stall the banks recovery.


France is not showing such positive signs of economic recovery but it does offer a good contrarian play. Plagued by accusations of corporate misconduct, France Telecom, recently renamed Orange SA (ADR) (NYSE:ORAN), is a risky play but the company has its strengths. Free cash flow was euro 1.1 billion for the first half of the year, easily covering the company’s euro 788 million dividend payment of 3.7%. Book value stands at $12.05 per share, so the company’s stock offers value. Revenue is struggling to grow but the company’s management is being proactive and is looking to cut costs.

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