17 Jul 2019

Bank of Ireland: H119 Preview

We have a note out this morning ahead of the bank’s H119 interim results out on 29th July.

We expect further progress on the rollout of the multi-year transformation programme, but a moderation in Irish residential mortgage activity (drawdowns and house prices both softer than expected) and continuing Brexit concerns are likely to have limited volume growth. Amid the backdrop of weak domestic credit growth and external economic risks, we continue to point to BIRG’s self-help initiatives on costs and technology as a value differentiator versus peers. 


Irish Homebuilders: Minister for Finance comments on the help-to-buy scheme

The HBFI yesterday released its first half-yearly update which shows early progress in its mission, while comments from the Minister of Finance on the help-to-buy scheme at the report’s launch event have garnered some column inches in this morning’s newspapers.

 

Home Building Finance Ireland is a state agency that was established to provide funding for the homebuilding industry, targeting small and medium-sized developers who have found it difficult to access traditional high street bank funding. It has a funding pool of €750m, which is expected to assist in the delivery of 7,500 units over the next 5 years. Its first update details over 100 expressions of interest, 30 full applications and €41m of approved funding to date, with funding at this early stage showing a bias towards Leinster and the Greater Dublin Area.


However, more significantly, there has been some mixed media interpretations of Minister Donohue’s comments on the prospective extension of the help-to-buy scheme at the event. The Minister noted that the first-time buyer grant has provided “a very valuable role” to homebuyers and that he doesn’t view the scheme as a subsidy to developers. However he also noted that the scheme was designed at a different stage of the cycle when “the market was performing in a particular way” and that he would assess what the scheme “is going to look like in the future” in the context of Budget 2020. 


As such, all options in relation to the initiative seem to remain on the table and, while we suspect that the scheme will ultimately be extended beyond its current end-year expiry date, we would not be surprised to see the terms altered in some way.


Irish banks: CBI tracker mortgage investigation hits 40k customers 

The final supervisory update/report on the long running tracker mortgage examination has now found c.40,100 customers have been impacted by unfair treatment of their tracker mortgage product. 


At end May 2019, €683m had been paid out in redress and compensation to impacted customers, with the total bill for the Irish banking sector, including accounting FV adjustments for reinstatement and legal/consultancy costs, are now likely to be well over €1bn. To date, only one institution has had a fine imposed on it by the CBI (PTSB, €21m) as a result of the investigation, but with enforcement actions ongoing against all of the other main high street banks still operating in the sector, we expect fines to be eventually levied against all of them (likely higher in € terms against AIBG and BIRG than the PTSB fine, but proportionately less impactful than on PTSB as a % of FY profits or mortgage assets).

 

Ocado - Digesting the M&S deal

Ocado has suffered c. 20% dip in share price over the last three months. While H119A was weaker than expected, our mid-term forecasts remain little changed. We believe that potential execution risk in the M&S JV augurs caution in Retail. In addition, value in the Solutions business rests on the long-term potential to generate capacity fee revenue.

 

The company remains in transition mode as the JV deal with M&S is expected to complete on the 5th of August 2019, however, it won’t be fully operational until the end of Ocado’s current supply contract with Waitrose in September 2020. We believe that there is potential execution risk over this transition period. 


While we believe that the Solutions division is the value driver, it is only in CFC building and commissioning mode at present. The forecast value of the projects hinges on the capacity fee Ocado generates from the CFCs once they are up and running. 


Sterling weakness continues on Boris No Deal plans

Sterling weakness continued throughout the day yesterday with EUR/GBP set fresh six-month highs, while GBP/USD fell to its lowest level in 2 ½ years. 


Initial morning headlines about poor progress in negotiations with Europe, gave way to reports later in the afternoon that Boris was considering starting a new parliamentary session at the beginning of November. This would involve a two-week prorogation of parliament at the end of October, and would hamper parliament’s ability to stifle a no-deal Brexit. 


While Boris has argued in favour of halting parliament to allow a no-deal Brexit to proceed, he had shied away from the argument in public debates recently. The confirmation that the plan is being actively considered by his team, and the fact that the confirmation of the next leader is less than a week away have brought no-deal fears closer to reality. Markets could now eye the turn of the year high of 0.918. Above that level, EUR/GBP has topped out at 0.9305 and 0.9415, both of which could be achievable targets if we continue to move towards a no-deal exit on 31 October.


Fed speakers

Yesterday, we heard from a flurry of FOMC participants including the Chair Jerome Powell, speaking in what will be one of the last opportunities to do so, before members are in the pre-meeting blackout, which begins from 20 July.

 

Ahead of the 31 July policy decision, Fed Chair Powell held a similar line to that presented in his testimonies to Congress last week, which appeared to set the stage for a precautionary rate cut at the end of this month. 


Of the other speakers, Charles Evans of the Chicago Fed’s comments have probably gained the most interest, with some debate amidst investors over whether the Fed could plump for a 50bp reduction at July's meeting. He said that “there is an argument that if I think it takes 50 basis points before the end of the year to get inflation up, then something right away would make that happen sooner”, however, this comment was made when prompted on his views on the various options facing the Fed. 


Other Fed speakers were less convinced on the case for a July easing altogether, with the San Francisco Fed’s Mary Daly saying, “at this point I’m not leaning one direction or another”. Meanwhile, Dallas Fed President Robert Kaplan, until recently a sceptic that rates should be cut at all, said he now thinks a “tactical” reduction of a quarter point could address the risks apparently seen by bond investors. 


The dollar has strengthened on the back of yesterday's Fed chatter, trading almost 0.5% stronger against the euro. We continue to judge that the most likely course of action is a 25bp cut in the Federal funds rate, to 2.00-2.25%, on 31 July.


First Female EC President

Yesterday, Ursula von der Leyen was elected as the new European Commission president, securing 383 votes out of 747 MEPs in secret ballot vote. An absolute majority of 374 MEPs was required to secure the position. She will take over the reigns from Jean-Claude Juncker on November 1st for a five-year term. Speaking after the vote, von der Leyen said ‘The trust you placed in me is confidence you placed in Europe.’ 


Von der Leyen has acted as the Minister of Defence of Germany since 2013. Her political agenda includes topical issues such as reducing carbon emissions, gender equality and perhaps more notably for Ireland, she has vocalised her support for the backstop and for an extension of the withdrawal date if required. 


Economic Releases

09.30  UK   CPI

09.30  UK   PPI

09.30  UK   Retail Price Index 

09.30  EU   CPI

12.00  US   MBA Mortgage Applications

13.30  US   Housing Starts

13.30  US   Initial Jobless Claims