AIB Group: Cost and capital disappointments

01 Aug 2019

We have a new note out this morning. 

H119 was a disappointment for AIBG as operating costs, exceptionals and capital guidance (TRIM + calendar provisioning) all came in materially worse than consensus. Further, while margins and market share held up ok, they were both slightly lower h/h, with excess liquidity and sluggish volume growth unlikely to support a rebound in either any time soon. 


Irish Economy: Manufacturing PMI moves lower in July 

The AIB Ireland Manufacturing PMI report for July shows a second successive month of contraction in the sector, with the headline PMI falling to 48.7 from 49.8 in June. This is the lowest reading since April 2013.

The report points to declines in output and new orders as key to the lower reading. The rate of decline in output was also the sharpest since April 2013 amidst panellists’ reports of softer demand conditions both domestically and abroad. Inflows of total new orders declined markedly in July with reports of Brexit uncertainty negatively affecting customer demand. Similarly, volumes of new work from abroad also fell in July and this contraction was the fastest for almost a decade. Stocks of finished goods accumulated sharply and at the fastest in the 21-year series history. While this was partly attributable to expectations of higher sales later in the year, we suspect lower customer orders is also behind the move. Turning to margin trends, although costs increased in July on the back of raw material price inflation, the rate of increase slowed to a three-year low. Manufacturers responded by reducing selling prices for the first time since May 2016.

However, despite this negativity, employment in the Irish manufacturing sector increased in July, albeit the increase was said to be “fractional”. While sentiment in the industry remains “strongly positive”, optimism regarding future output weakened to a three-year low amidst the clouded outlook. 

The uncertainty emanating from across the Irish Sea is taking its toll on the manufacturing sector here as evidenced by the lowest PMI reading in more than six years. Unfortunately, a reduction in this uncertainty does not appear imminent.


FBD Insurance: Strong H119 on COR, NAV and investment income  

FBD H119 results (PBT €39m +100% y/y) look strong on COR compared with H118 (82.5% vs 88.6%) and underwriting performance (LR 56.4% vs 63.3% and €29.2m u/w profit vs €18.9m) based on benign weather and disciplined underwriting, but also aided by further prior year reserve releases. GWP of €190m was flat y/y, which looks in line. Investment income of €8.6m (4.3% return annualised) and €14.0m mtm gains (2.7% annualised) also well ahead of c. nil consensus and slightly negative Hy18 outcome on that line. NAV jumps to 896c from 818c at FY18, well ahead of consensus. 


FOMC cut 0.25%

Last night, the Federal Open Market Committee cut the Federal funds target rate as broadly expected, by 25bps to 2.00-2.25%. It also opted to halt the QE balance sheet run off, sooner than the initial stop which was scheduled for the end of September. There were dissentions from the Kansas City Fed's Esther George and from Boston Fed chief Eric Rosengren; both favoured steady policy yesterday.
 
For markets, betting that a 25bp cut was around 80% likely, the main focus was on Chair Powell’s signals on the path of policy ahead. Here the Fed chief made clear he did not see the cut as the start of an easing cycle but rather a “mid-cycle” adjustment. This left investors concerned over market pricing, which point to three further 25bp cuts over this year and next, might not be fulfilled. 

Chair Powell did though maintain his messaging that the Fed would act as appropriate to sustain the expansion and talked of doing this “over time” which looked to be a hint there might be further mid-cycle adjustment(s) to come. 


Dollar higher

There were no new ‘dot plot’ forecasts this time. In his press conference, it appeared the Fed chief was closely tying this to the evolution of trade risks and the evolution of the global backdrop. Note there were no major changes of tone in the economic outlook or on inflation in the policy statement, reinforcing the “insurance” nature of last night’s rate cut. 

After the decision and press conference, US stocks closed lower, unimpressed with Chair Powell’s dismissal of this being an easing cycle; the S&P closed off 1.1%. 10-year US Treasury yields are now up to 2.04% from around 2.02% before, while the dollar firmed too. The benchmark EUR/USD rate is now in/around $1.1050 from around $1.1140 before the decision last night, the lowest since May 2017. 

For the record, note that we have a further 25bp cut in our forecast for the September meeting. Before then, we will hear from Chair Powell at the 22-24 August Jackson Hole conference.


BoE decision due 

The BoE MPC’s policy announcement, together with the minutes from the meeting, is scheduled for midday today. In addition, there will be the simultaneous publication of the quarterly Inflation Report (IR). Then 30 minutes later BoE Governor Mark Carney will host his IR press conference.
 
It is very likely that the committee will maintain the Bank rate at 0.75% unanimously (9-0) for the eighth meeting in succession. Similarly, we envisage no changes to the other aspects of the stance of policy, specifically the targeted stock of purchased gilts (£435bn) of corporate bonds (£10bn). 

Committee members seem entrenched in their position that Brexit uncertainties warrant a wait and see approach. The MPC’s collective view, expressed again in May’s IR and reaffirmed at last month’s MPC meeting, is that a smooth transition to a Brexit end-state results in above trend GDP growth and warrants a gradual and limited tightening in policy. Nevertheless, members cannot be confident about this baseline view given the higher risks of a disorderly EU departure on 31 October (or perhaps later).


Trump blasts Powell

US President Donald Trump has blasted Federal Reserve Chairman Jerome Power despite delivering the first interest rate cut in 10 years. Mr. Trump took to Twitter last night to slam the 25 basis point reduction and state that Jerome Powell “let us down” by delivering an interest rate cut that’s not aggressive enough to boost the economy. According to the President, the Fed should be supporting his administration’s efforts to make America more competitive “keep pace with China, The European Union and other countries around the world”.


Economic Releases

09.00 EZ Manufacturing PMI
09.30 UK Manufacturing PMI
12.00 UK BoE Interest Rate Decision
12.30 UK BoE Gov Carney Speaks
14.45 US Manufacturing PMI
15.00 US ISM Manufacturing PMI