Why I invested in Richie Boucher – by Wilbur Ross

OUR due diligence on BoI convinced us that Richie was the right leader for BoI. Subsequent events have confirmed that – though I do think he has had the toughest job of any of our portfolio bank CEOs.

At first he had to defend himself in fitness and probity investigations while simultaneously adjusting to a new mix of board and shareholders – all the time making decisions that were necessary, but sure to attract public and political criticism.

He never flinched.

Turnaround investors like myself always try to accelerate the pace of change, but I don't think there is much he could have done faster.

His approach to delinquent loans recognised that modifications had to address both ability to pay and willingness to pay, and that the bank needed to signal its policies clearly and consistently and to rebut the arguments of nay-sayers. He did so and in my view has done the best job of any Irish banker in bringing down delinquencies via effective loan modifications without unduly compromising principal amounts.

He took a sensitive leadership position in negotiating the new groundrules for insolvency regimes. His tireless efforts to restore net interest margins to adequate levels have become controversial, but are essential to recreating a sound banking system without which Ireland would not prosper.

Staff matters have been another difficult challenge. Think how hard it is to maintain morale when you are closing branches, seeking thousands of redundancies and have pay caps and two renegotiations of pension benefits. Yet each was essential and needed immediately.

Failure to accomplish anyone of these daunting tasks would have derailed the whole resuscitation of the bank. Pensions alone were a €1bn-plus unfillable hole and the cost reductions from employee redundancies exceeded €300m per year.

Then there was the capital structure. The Government had cleverly constructed a complex spider web of financial engineering – it protected its own interest but put the bank and its common shareholders very much at risk.

Richie dealt one by one with the ELGs of deposits, which were costing over €300m per year. It would have made his life easier to leave them in place, but he led the charge for their removal – and finally succeeded last March.

Then there was the convertible preference shares that eventually would have cost him hundreds of millions of euro. To deal with the clumsy financial structure, he had to regain access to the international capital markets simultaneously with the Government's efforts to do the same.

Even before the turnaround became obvious, Richie and his team began courting Wall Street. He articulated his plans, presented realistic goals and timetables, and gradually built credibility by delivering what he promised – despite early scepticism on the part of many observers.

At this point, BoI returned to the State the capital, fees, interest and dividends in excess of the Government's gross commitment to the bank. Government still retains common equity which has a market value of about €1.3bn.

The bank's successes and those of Government have been mutually reinforcing, just as their earlier travails were mutually debilitating. Neither could have done as well without the other's achievements – and that will remain true as the Irish economic recovery continues. But the relationship between two has been inherently complex.

The Irish State has been not only the biggest financial stakeholder, but also needed to insulate itself from the risk that BoI might fail again. This meant that the regulatory side of government had to be very strict, even though that might not be best for the investment side.

This came to a head recently when the Regulators conducted yet another stress test which concluded that, under the most dire circumstances, as much as €800m more of loan losses might be incurred. Even earlier, in June, the Regulator pushed the bank to take and extra €100m.

Meanwhile, the Irish property market has been turning around – as has the economy – and actual delinquencies seem to be well under control. I don't know how much of the stress test numbers management the board and the auditors will decide to record in the year-end report (to be issued March 3), but my personal belief is that the vast bulk of this rainy day provision will never be needed to cover actual losses.

It is comforting to know that BoI could withstand great stress, but every day that goes by reduces the risk that stress case conditions will ever become reality. The Regulators did acknowledge that despite the stress test results BoI did not need to raise more capital.

In any event, I believe that Richie's ultimate vindication will begin in 2014 as the bank achieves its goal of profitability.

That may not silence the anti-Richie, anti-bank or anti-government crowd – but at least Richie will have the personal satisfaction that he engineered the most successful European bank turnaround, and the only Irish one so far since the crisis.

The task ahead is not to let up and to keep the momentum going.

• Wilbur Ross is a legendary investor best known for restructuring failed companies. He is currently ranked number 209 on the Forbes' Rich List with a net worth of $2.6bn

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