With the Irish economy firmly on the up once again, Ireland’s two pillar banks, AIB and Bank of Ireland reported strong H1/17 results. Permanent TSB’s non-performing loan book is still a major legacy issue weighing on investor sentiment. All three publicly quoted Irish banks published results in the last week in July. Here we summarise their recent performance and share our outlook.
Permanent TSB reported a very mixed set of H1/17 results, to which investors reacted very negatively. The Group made good progress on new lending growth which was up 62% year-on-year to €392m, and grew its market share of new Irish mortgage lending to 10.8%. It also saw a small uptick in its Net Interest Margin to 1.81% in H1/17.
However, investors were clearly disappointed by the negligible €100m reduction in the banks’ outstanding Non-Performing Loan (NPL) balance which reduced to €5.8bn in June 2017 from €5.9bn in December 2016 despite a strengthening Irish economy and rising house prices in 2017. NPLs as a percentage of gross loans actually increased to 28% in June 2017 from 27% in December 2016, unlike AIB and Bank of Ireland where NPL balances have steadily trended lower in recent years. PTSB’s management team plans to tackle the €2.7bn of NPLs (13% of gross loans), which are still classified as untreated, as a priority. The bank is open to disposing a proportion of NPLs however the level of haircut given on such a potential sale is uncertain at this point and led us to downgrade our outlook on the stock from Outperform to Market Perform once again. The outcome of the ECB’s TRIM review process and the introduction of IFRS9 are also negative headwinds to the Group’s future capital positions. These factors ultimately push back the likelihood of any dividend until 2020 at the earliest in our opinion.
Bank of Ireland
Bank of Ireland’s H1/17 results were positive overall; however its share price remains virtually unchanged since release. The Group generated an underlying profit of €480m which was 11.3% ahead of consensus expectations of €431m. New lending was €6.6bn, marginally down compared to €6.9bn recorded in H1/16, but was flat year-on-year on a constant currency basis. Its market share of new mortgage lending remained constant at 26%, but this lending channel offers attractive growth prospects over the medium term as the Irish housing market continues to recover from depressed levels. Impaired loans in H1/17 reduced by €800m to €5.4bn, while Non-Performing Exposures (NPE) fell by €1.3bn to €8.1bn. The bank’s pension deficit stood at €490m down from €650m in Q1/17, as European yields ticked higher in the quarter. It recorded an impairment charge of €59m (14bps) which came in below management’s expectations.
Management reiterated its intention to recommence dividend payments in respect of financial year 2017 with the initial payment likely to be made in the first half of 2018. Its capital position strengthened with a Fully Loaded CET1 ratio of 12.5%. We maintain our Outperform stance and 12 month target price of €8.16. It currently trades at 0.81x 2017’s Price/ Book. Despite having a greater loan exposure to the UK, BOI is our preferred play from the Irish banking sector given its valuation discount relative to AIB.
Allied Irish Bank’s first set of results since the Irish Government’s 28.7% equity sale was very encouraging. Underlying profitability was €800m for H1/17 driven by strong sustainable business performance. Its Net Interest Margin (NIM) rose to 2.54% in H1/17 from 2.06% in H1/16. Its positive NIM trajectory was the result of lower funding costs, stable asset yields and the redemption of legacy instruments. It has now completed €705m of its on-going €870m IT capital investment programme which will be completed in the second half of 2017 and should lead to operational efficiencies in the Group going forward. The trend of improving asset quality remains firmly in place with a further €1.3bn reduction in Non-Performing Loans (NPLs) in H1/17, €500m in Q1/17 which accelerated to €800m in Q2/17. NPLs as a percentage of gross loans fell from 14% to 12.1%. Its Non Performing Exposure (NPE) balance reduced by €2bn to €12.1bn. It generated 130bps of organic capital in the first 6 months of 2017 and saw its fully loaded CET1 position improve to 16.6% at June 2017 from 16.0% at March 2017. New lending was up 15% to €4.3bn in H1/17 from €3.9bn in H1/16, with a 41% growth in new mortgage lending in Ireland, which should be an attractive avenue for new lending growth over the coming years.
Overall a very strong update with improving asset quality, a positive NIM trajectory, growth in new lending, a strengthening capital position, and with its IT capital investment nearing completion, the bank should be able to reduce its cost/ income ratio over the coming years. We maintain our Outperform outlook and our 12 month Target Price at €5.05, and believe AIB can be viewed as a sustainable dividend story and is a more focused play on a strengthening Irish economy than BOI. However given that it trades at 1.05x Price/ Book, which is close to fair value, we favour BOI in the near term.
To speak with a Portfolio Manager or Account Executive, phone the Cantor Fitzgerald dealing desk on 01 633 3633.
Click here to download our August Investment Journal.