01 Mar 2019

AIB Group: FY18 results in line and further progress on NPEs

AIBG’s FY18 comes in broadly in line on the income statement, with an underlying operating profit before tax -11% y/y of €1,400m (FY17 €1,574m, INVe €1,401m), supported by broadly stable NIM (new IFRS9 basis) of 247bps (FY17 250bps, INVe 247bps, and Q418 exit NIM of 248bps), underlying costs +1.4% y/y of €1,448m (FY17 1,428m), cost/income (ex reg fees) at 53%, and a net credit impairment write-back of €204m (FY17E €386m, INVe €183m).

There was some yet again noisy negative exceptional items, totalling -€167m (FY17 -€268m), bringing reported PBT to €1,092m, -2% y/y and -5% vs our forecast of €1,145m. However the dividend should be ahead of forecast at €461m (FY17 €326m) and a DPS of 17c (FY17 12c). NPEs declined at a sharper rate than we expected, a €4.1bn reduction y/y bringing these to €6.1bn and now at 9.6% of gross loans (FY17 16.1%). The reduction in NPEs remains key to unlocking the excess capital on balance sheet, with a FLCET1 of 17.5% (FY17 17.5%, organic capital generation of 210bps but perhaps a small miss here on reg capital headwinds) vs a SREP requirement of 11.55% indicating the size of the buffer available here (initially distributable next year, in our view). Net loans increased by 1.5% y/y to €60.9bn, while performing loans increased +7% y/y to €56.8bn. New Irish residential mortgage lending increased 16% y/y to €2.8bn off a market share of 32% while new corporate lending increased +24% y/y to €4.0bn.


Results look in line overall, with a small capital miss offset by better NPE progress and a stable NIM after the BIRG miss on Monday.


Irish REITs: CBRE comments on the property market


CBRE has released its latest Bi-Monthly Research Report on the Irish commercial property market. Key points below.


Notwithstanding the Brexit timelines, “investor and occupier demand for Irish real estate remains strong regardless”. There is particular interest in BTR (build-to-rent), office and industrial assets. A busy Spring selling season is expected, with several high-profile assets due to come to market in the coming weeks.


Last year was a buoyant one in the commercial property market, with office take-up at an all-time high while annual industrial take-up was the second-highest on record. Occupiers are said to be increasingly focusing on ‘edge of city’ assets, which will be of interest to the likes of GRN and YEW who have suburban Dublin exposures, while IRES’ dispersed (within Dublin) portfolio keeps it strongly positioned in a booming local market. Outside of the capital, new schemes are slated to start in Galway, Cork and Limerick, which is timely given the low vacancy rates in Dublin.


Structural headwinds and Brexit uncertainty are unhelpful for the retail sector in general, although there is still good interest from food offerings and specialist outfits in space, particularly in areas with fast-growing populations. The industrial sector continues to see good momentum due to a mixture of supply chain recalibrations and the underlying strength of the economy. Rising rents (CBRE sees inflation of 6.5% in 2019) are making development more attractive, so more industrial schemes are expected to start over the coming quarters, which is helpful given the pent-up demand from indigenous and international occupiers.


On the investment side, yields are seen strengthening in the PRS, office and industrial segments, which augurs well for all of the listed REITs. Retail yields (in general) are expected to weaken, although the REITs’ exposures to that space are minimal.


This report chimes with our own view on the Irish commercial property market, which is that its fundamentals remain strong which, in turn, helps to inform our positive stance on the investment case for the REITs.


Irish Economy: Manufacturing PMI strengthens in February


The latest AIB Manufacturing PMI release shows that the rate of activity in the sector picked up in February, with the headline PMI improving to 54.0 from January’s 27 month low of 52.6.


The shadow of Brexit has loomed over recent PMI releases, with today’s release being no different. Uncertainty around the process led to stocks of purchases among Irish manufacturers growing at the fastest pace in the near 21 year series history. The rate of accumulation of post-production inventories quickened to a 13 month high, with Brexit cited by panellists as a key driver of this.


The release also shows that there was a welcome improvement in new orders from both domestic and overseas customers. Of the latter, the US and UK were notable sources of demand last month. However, despite this uptick in demand there was a sixth successive depletion in backlogs of work in February, possibly due to a spike in hiring (to a four month high).


On margins, input price inflation has eased to a 16 month low, while output charges are rising at the fastest pace in nine months.


A healthy 49% of panellists expect growth in production over the coming year, although overall sentiment has softened to its lowest in a year-and-a-half, with Brexit (once again!) cited as the cause of mthis.


How matters evolve at Westminster over the coming weeks will clearly set the agenda for overall economic progress this year.


Irish Economy: Weak car sales put the brakes on retail sales


Retail sales data for January, released by the CSO, show a sluggish start to the year, with seasonally adjusted headline sales down in both value (-0.6% m/m) and volume (-1.2% m/m) terms. On an annual basis, the value of spending was +0.2% y/y, helped by a 0.6% y/y rise in volumes.


Of course, the headlines seldom tell the full story. Stripping out the volatile motor trades component shows that core (ex-auto) sales were up in both value (+0.2% m/m and +2.3% y/y) and volume (+0.7% m/m and +4.0% y/y) terms. Previously published CSO data show that new car sales tumbled 13.7% y/y in January (a drop of 3,534 sales), while sales of second-hand cars licensed for the first time in Ireland rose only 1.3% y/y (an increase of 106 vehicles) that month. So, a sluggish headline retail sales performance was always going to be on the cards.


Indeed, data for the 13 different segments of the retail sector show a broad-based improvement, with nine posting annual increases in the volume of sales and 10 posting a higher value of sales compared to January 2018. There were particularly strong performances from a number of discretionary areas such as electrical goods (volumes +15.5% y/y) and furniture & lighting (volumes +8.8% y/y).


With the economy adding 1,000 jobs a week (employment was +2.3% y/y in Q418) and wage inflation running at a post-crisis high of 4.1% y/y (in Q418), roughly six times the headline rate of increase in the cost of living (as measured by the CPI), it is not a surprise to see a good performance from core retail sales. On the motor trades, new car sales (on a 12mma basis) recorded a post-crisis peak of 11,860 in August 2016 but have subsequently dropped 17% to the current 9,802 level, largely due to sterling weakness in the wake of the UK’s vote for Brexit. The recent rally in the pound should help Irish car dealers, although structural factors in the auto industry may add another complicating factor to the story, with electric and hybrid cars’ combined share of new sales increasing to 11.6% in January 2019 compared to 7.6% in January 2018. 


UK manufacturing data due

As markets take a well-deserved Brexit breather, focus turns back to the more mundane task of data analysis. Later this morning we get to see how the UK manufacturing sector has been performing. January's PMI index dropped by close to 1½ points to 52.8, a three month low. The survey also revealed that inventory levels rose at their fastest pace in the 27- years of the survey's history, as firms insured against a no-deal Brexit with some commentary a month ago seeming to imply that this had weakened activity. In fact the opposite is true. Manufacturing globally is generally struggling, which of course is not solely due to Brexit but is more connected to trade tensions between the US and China, as well as idiosyncratic factors such as tougher car emissions standards. Indeed the 'flash' Euro area PMI for the sector in February weakened further to 49.2 from 50.5 in January. Bearing these factors in mind, it is difficult to envisage a recovery in the UK index this time. Indeed we are pencilling in a decline by a further point to 51.8. 

Encouraging Chinese manufacturing data


February’s index, released earlier this morning, recovered to 49.9 from 48.3 in January well above the 48.7 consensus. While this is still below the 50 breakeven level (just) the direction of travel is positive and contrasts with the more negative tone of the official PMI earlier this week. Moreover new orders jumped to 50.2 from 47.3 with domestic demand improving markedly in February. That said, one has to be careful of Lunar New Year based distortion to the data at this time of year.




Q4 data showed output growth stronger than expected at an annualised 2.6% (consensus 2.2%, Q3 3.4%). This is despite the government shutdown towards the end of last year. Recent reports showed significant increases in inventories. However stockbuilding did not have a material impact on the figures - final sales (i.e. GDP ex-inventories) rose by 2.5%. Consumer spending increased by 2.8%, with spending on durables up 5.9%. Meanwhile weekly figures showed that jobless claims nudged up by a little more than expected to 225k (consensus 220k, last week 217k).


Economic releases


09.30 UK Manufacturing PMI

10.00 EZ CPI

15.00 US ISM Manufacturing Employment

17.50 US FOMC Member Bostic Speaks