25 Feb 2019

Bank of Ireland: Progress on volumes and costs offset by NIM headwinds in Q4

BIRG FY18 results proved to be a mixed bag. Underlying PBT of €935m (basic EPS 57.7c, u/l EPS 64.8c, adj ROTE 8.5%) was slightly lower than consensus (€956m), but there was solid progress on volume growth (€77.0bn +1.1% y/y, with both mortgages & corporate strong and SME not as bad as feared) .

BIRG also achieved cost reduction (underlying opex -2.5% y/y), while the dividend of €173m was a touch ahead of forecast at 16c per share (FY17 11.5c). These positives, however, were held back by slightly lower NII (-1% vs expected with NIM at 220bps vs FY17 229bps, the miss was almost entirely UK related), other income (-2% vs expected) and capital (FLCET1 13.4% vs 13.7% consensus). Non-core (exceptional/ restructuring) costs of €100m were broadly in line if slightly higher than what we expected (INVe €90m).


Other items to highlight were significant progress on the expansion of the W&I division (previously BOI Life), which grew business income +21% vs 2017. The reduction in NPEs (-24% or €1.5bn y/y to €5.0bn or 6.3% of loans) was again ahead of expectations, and this may be progressed further in 2019, as management is looking at a potential BTL securitisation. Additionally, the impairment environment remains benign, with a FY18 net impairment gain of €42m (slightly better than expected). Transformation programme investment of €306m (€113m expensed) also came in in-line with guidance.


NIM underperformed by more than expected as a c.210bps Q418 outturn dragged FY18 NIM down to 220bps vs 222bps consensus and 223pbs 9M18. This undershoot was entirely UK-related, as general competitive pressures in the mortgage market were added to by a one-off negative EIR adjustment of 10bps to NIM, caused by shorter than assumed reversion periods. Further, the 2019 NIM outlook has been reduced to c.216bps (previously c.223bps) as a result of the likely sale of the UK credit cards business (-3bps) and some previously flagged MREL issuance impact (-1bps). Additionally, management has flagged a -20bps capital impact in 2019 from IFRS 16, and that other potential regulatory capital headwinds (IRB models, NPE coverage requirements) could consume as much as 80bps of CET1 over the next two years, so opportunities to unlock capital on the balance sheet will continue to be looked at.


UK this week


Top of the bill in the UK will of course be politics, following last week’s seismic events. Specifically markets will try to fathom out the implications of the formation of the new 11 strong Independent Group (TIG) in parliament, made up of 8 former Labour MPs and 3 Tories. Certainly it is not clear how much traction the grouping will have (as yet it is not formally a political party) and what the medium-term implications are. Many parallels are being drawn with the formation of the Social Democratic Party (SDP) in the early-1980s. We have a more detailed note on the upcoming Westminster shenanigans in our ‘Thought of the day’ below. On non-political/Brexit UK items, Mark Carney plus MPC colleagues appear before the Treasury Select Committee on Tuesday, a short while after the BoE Financial Policy Committee publishes its quarterly statement. In terms of data, the pick is probably Friday’s manufacturing PMI for February, which we fear will be downbeat, in line with flash estimates from the Euro area.


US this week


US monetary policy moves back to the forefront, with Fed Chair Powell testifying to Congress on Tuesday and again on Wednesday following a shutdown related delay, Q4 GDP is released on Thursday which we judge will reveal a solid rate of growth, albeit not as firm as Q3’s annualised 3.4%. The manufacturing ISM is published on Friday but the jobs report is due a week later. President Trump is scheduled to meet North Korean leader Kim Jong-un in Vietnam on Wednesday and Thursday. He said yesterday that he would delay increasing US tariffs on Chinese goods, tweeting that talks with China had been “productive”.  That pushes back the 1 March deadline, when the US President might otherwise have raised tariffs to 25% from 10% on $200bn worth of Chinese imports into the US. In comments on Twitter the US President also said that they were planning a Summit for him and President Xi at Mar-a-Lago, to conclude an agreement.


EU and China this week


In the Euro area the key release will be February’s flash HICP estimates on Friday. With the ‘core’ measure of inflation standing at 1.1% in January, we would note that there has been no convincing upturn in the series for two years or so and that the current weakness of the Eurozone economy risks this period being extended. China sees the release of both sector official PMIs, plus the Caixin manufacturing index. They are signalling weakness in the factory sector of late, but we would be wary of drawing firm conclusions given the various distortions stemming from the timing of the Chinese Lunar New Year.


Delay, Delay, Delay


Papers were awash with headlines of potential Brexit delays over the weekend. From the 2 week extension to May’s “meaningful vote”, to talks of extensions ranging from 2 months (Telegraph) to almost 2 years (Guardian) to the Brexit date itself. The pound has strengthened marginally over the weekend, as prospects of a no deal seem less likely, while expectations of an extension are rising.


UK PM Theresa May has pledged that a fresh ‘meaningful vote’ on a revised Brexit deal will take place in Parliament by 12 March. This appears to have arisen as a number of members of the government, including three members of the Cabinet, have indicated willingness to back the ‘Cooper/Letwin’ amendment on a vote on Brexit progress on Wednesday evening. This would direct the government to request an extension to the Article 50 process, should it not get a deal through Parliament by 13 March. The PM is currently in Egypt at an EU/Arab Summit at which relatively little concrete (in terms of Brexit) appears to have emerged. However it has been suggested that if the EU were to offer an extension to EU membership, it could be over a 21 month period, as they are reluctant to give the UK a short delay which won’t give the UK government and UK and EU negotiators sufficient time to fully resolve the outstanding issues. This could also be designed to encourage the Tory Eurosceptics to back any revised deal that the PM puts to the Commons for fear that a longer extension may reduce the odds of Brexit happening at all. Mrs May will be delivering a statement to the House tomorrow, before the debate the following day.



Economic releases


15.30   US        Dallas Fed Manufacturing activity

16.00   US        Fed’s Clarida speaking