26 Jun 2019

Bank of Ireland: CFO to leave

Bank of Ireland (BIRG) has announced that its Chief Financial Officer Andrew Keating is to leave the bank, for a job with an unnamed international organisation outside the financial services sector. 


Mr Keating has been CFO and a member of the board since 2012, and has been a key support for current Bank of Ireland CEO Francesca McDonagh since her appointment in 2017, having also served in the CFO role under previous CEO Richie Boucher.


BIRG said that Mr Keating is expected to leave the bank by the end of this year, and that a process to appoint a successor will now commence. We expect this process to look at both internal and external candidates.


Housebuilders / REITs: Q2 housing report

Ireland’s largest property website,, has today published its latest quarterly report into house prices.


The report shows a welcome uptick in the supply of homes for sale, with over 8,200 properties listed on the website in May, the highest monthly total in just over a decade. This is particularly true for Dublin, where over the past 12 months there have been an average of 5,000 units for sale across the city at any point, up from 3,200 in the period between July 2016 and June 2017.


This increased supply has helped to cool price inflation in Dublin, which is being significantly outpaced by price growth elsewhere in Ireland (the Central Bank’s macro-prudential rules, which slap LTI and LTV limits on the majority of front book lending, are another critical factor behind this shift).


The report also highlights the dysfunctional nature of the new homes market. Average household income is close to €50,000, yet it is very challenging to build a home for anything less than €250,000. Thus we have one-off and scheme houses dominating new build activity, notwithstanding the trend towards smaller household sizes (see our population comment below for more on this).


On pricing, 25 of the 26 counties of Ireland posted an annual increase in prices in Q2, with particularly strong inflation evident in Munster (the South), where double-digit price growth is evident in most areas. Prices rose by low single digit percentages in most other areas, while Dublin prices were up just ~1% y/y.


Housing output in the 12 months to end-Q119 was 18,828 units, well adrift of even the low point of the range of estimates (30,000 – 50,000) of annual new household formation. Given the strong economic backdrop, our contention remains that the path of least resistance for house prices and rents remains to the upside.


Irish Economy: Government publishes its Summer Economic Statement

The Irish government yesterday published its Summer Economic Statement, which sets out the economic backdrop and quantifies the fiscal ‘wriggle room’ available to policymakers ahead of this autumn’s Budget.


In the document, the government sets out five core objectives, which are: (i) increase budgetary surpluses and reduce public debt; (ii) deliver steady and sustainable increases in public services; (iii) continue to invest in infrastructure; (iv) maintain economic competitiveness; and (v) sustainably improve living standards.


In terms of the current growth trajectory, the Department of Finance assumes headline GDP growth of 3.9% this year and 3.3% in 2020 (for reference, we are on 4.3% and 3.4% respectively). The document says that the data flow since this forecast was made "has been relatively strong, and the economy may be on the verge of over-heating".


In shaping policy for October's Budget, the government is focused on developments in the UK's divorce from the European Union - "The overarching budgetary priority must be to protect domestic living standards, irrespective of the format that Brexit takes. This means building up our fiscal buffers so that, in the event of a disorderly Brexit, budgetary policy can respond accordingly". To this end, the government has set out two scenarios, the first involving an orderly Brexit at end-2020, the other a hard Brexit in the autumn.


Under the orderly Brexit scenario, the State will run a 0.4% surplus in 2020, even after utilising net fiscal space of €0.7bn. In the event of a hard Brexit, the State is guiding a deficit of up to 1.5% of GDP in 2020 - unhelpful, but not disastrous. It is also worth remembering that the 'official' guidance from the Department of Finance has plenty of form for under-promising and over-delivering on the fiscal side.


There are risks a-plenty for Ireland at this juncture, both external (Brexit, trade wars, international tax rule changes) and internal (overheating risk in some sectors). To this end, it is eminently sensible for policymakers to have a menu of options to consult when framing October's Budget.


Irish Economy: Stock of business credit declines in Q119

Central Bank data on credit and deposits in the Irish resident SME and large enterprise for Q119 were released yesterday. Key points below.


Gross new lending to Irish resident SMEs slowed to €1.1bn in Q119 from the previous quarter’s €1.5bn flow. The sequential fall was primarily driven by the property investment and development segment (€181m versus €346m in Q418), which likely reflects lumpy transactional activity. Nonetheless, of the 15 segments of the SME universe, only three posted an increase in new lending activity, a soft reading which may have been influenced by nervousness ahead of the original Brexit departure date of end-March.


Total SME credit outstanding was €22.2bn at end-Q119, -5.8% q/q and -14.9% y/y. The stock of ‘core credit’, which excludes the financial intermediation and property-related sectors, has fallen by 8.6% over the past year, which shows that Irish SMEs remain cautious notwithstanding Ireland’s EU-leading growth profile (GDP was +6.7% in 2018). Indeed, gross new lending to SMEs in the 12 months to end-Q119 totalled €5.1bn, the lowest since Q417, although gross new lending to ‘core’ SMEs of €812m in Q119 was in-line with the quarterly average of €775m since Ireland exited the bailout at the end of 2013.


The release also provides details on developments in the rates environment. The weighted average interest rate on outstanding loans increased by 4bps in the quarter to 3.51%. At first glance this seems a surprising development given market trends, but it is explained by mix effects as front-book (new lending) rates of 4.14% are well above the blended back-book rate.
In terms of the broader Irish resident private-sector enterprise data, the stock of credit outstanding at end-Q119 was €81.5bn, -1.8% q/q and -8.1% y/y, although core credit (excluding the financial intermediation and property-related sectors) rose by an impressive +5.1% y/y. It would seem that larger enterprises are less nervous than their SME counterparts when it comes to taking on leverage at this time.


With that being said, the cash pile at Irish resident private sector enterprises (in aggregate) continues to build. Aggregate deposits stood at €97.5bn at end-Q1, +€1.4bn q/q and now back to its highest level since September 2008 (€103.7bn). Core deposits grew €674m q/q and €2.3bn y/y to €50.4bn.


When set against the backdrop of heightened Brexit uncertainty and international trade spats, it is not a surprise to see that Irish SMEs adopted a defensive posture with regard to leverage in the opening months of 2019. Nonetheless, with high frequency data points showing solid growth in Q119, it seems that the economy still performed impressively even while operating in deleveraging mode (i.e. a contracting stock of credit outstanding). Were political developments at Westminster and Washington to provide a tailwind to global growth over the coming quarters, this could lead to greater appetite for credit by Irish resident firms, with a resultant lift to economic momentum.


Irish Economy: CSO sets out population projections

Ireland’s CSO yesterday published updated regional population projections, setting out its forecasts on how the national headcount might evolve under a variety of different assumptions out to 2036.


The 2016 Census’ “usually resident” population count of 4.7m is the base population for the CSO’s estimates. The principal assumptions that the CSO uses hinge on four key areas – fertility, mortality, internal (in or out of Dublin) migration and international migration. On fertility, the Expert Group that signed off on these assumptions foresee the total fertility rate declining from 2016’s 1.8 to 1.6 by 2031 and remaining constant thereafter. Mortality is seen to improve for both males (from 79.3 years in 2015 to 83.6 years in 2036) and females (from 83.3 years in 2015 to 86.5 years in 2036). The Expert Group used three net international migration scenarios of +10,000 per annum, +20,000 per annum and +30,000 per annum (Year to April 2018 actual: +34,800), while for internal migration two scenarios, one with net internal migration inflows, the other with net outflows, are modelled. 


This exercise shows that the population of Ireland is projected to increase under all scenarios to 2036. The Mid-East region (essentially, the Dublin commuter belt) is expected to have the strongest growth of between 18% and 40%, depending on which scenario is used, while the capital is seen to grow by between 5% and 39%. The Midlands are seen to grow by between 8% and 38%. Other areas are generally seen to grow by single digit percentage up to growth in the teens percentages, although it is possible that the South-West and Border regions could see some modest population shrinkage under some scenarios.


In terms of actual population, the State is projected to add up to 1m people by 2036 (to a population of 5.8m), while Dublin’s population could rise from 2016’s 1.3m to 1.9m by 2036. In round figures, and assuming an average of 2.0 persons per unit (below the current average of 2.4 on the assumption of an ageing population meaning more single person households), this implies that the State will need to add up to 0.5m housing units between 2016 and 2036. Output last year was just 18k, so well adrift of where construction activity needs to be.


The release shows that while the working age population is expected to increase over the coming decades, the older (65+) population is expected to grow at a much faster rate, which poses challenges for policymakers in terms of pension provision and so on.


These data pose interesting questions for a variety of sectors, including but not limited to the REITs, housebuilders, financial services and transport & leisure stocks.


Fed comments overnight

Comments from various Fed officials overnight triggered a paring back in expectations of how aggressive (and how rapidly) any policy easing might be seen from the Fed, with the key comments for markets coming from Fed chief Jay Powell and from the usually ultra-dovish St Louis Fed chief, James Bullard.


Chair Powell said that the case for a rate cut has strengthened somewhat given that economic “crosscurrents have re-emerged” but he held back from signalling an imminent cut and said the question the Fed was “grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation”. Meanwhile comments from James Bullard, a voting member of the FOMC this year, dampened market expectations further after the current most dovish FOMC voter (who dissented against the ‘on hold’ decision in June, preferring an imminent cut) said “I think 50 basis points would be overdone” and that “I don’t think the situation really calls for that. But I would be willing to go 25”.  US stocks closed down after the comments, with the S&P 500 ending the session nearly 1% lower whilst interest markets have pared back their expectations of any policy easing in July.


The dollar has also made gains too, rising most clearly off the back of James Bullard’s comments around 5.30pm UK time yesterday (€:$ moved from $1.1390 to $1.1350)


Sterling slips as Boris talks hard

The frontrunner to be the new UK PM, Boris Johnson renewed his ‘hard’ Brexit language yesterday on a radio interview, across twitter and in an open letter to his nearest rival, Foreign Secretary, Jeremy Hunt.


On twitter he put it right up to Mr. Hunt saying that “if I become PM, we will leave the EU on 31st October, deal or no deal. Today I have asked @Jeremy Hunt whether he will also commit to this date, no matter what. We must keep our promises to the British people and deliver Brexit - no ifs, no buts, and no second referendum”. The Tory party officially announced yesterday that the newly elected PM will be unveiled on July 23rd.


The Reserve Bank of New Zealand on hold

The RBNZ held interest rates unchanged at its latest MPC meeting but signalled more cuts may be on the way. The post meeting statement was more dovish than some had expected. The RBNZ became the latest central bank to see its currency strengthen after trying to deliver a dovish message on interest rates, as markets zeroed in on an unchanged cash rate to push the New Zealand dollar higher. Market pricing is now at a 67% chance of another cut in August, with the year-end rate likely to come in at 1.00% from the current 1.50%.


Economic Releases

10.15 UK BoE Gov Carney speaks
10.15 UK Inflation Report Hearings
13.30 US Core Durable Goods Orders
16.30 US FOMC member Daly Speaks