03 May 2019

Bank of Ireland: Trading update shows Q1 in-line, cost cutting momentum continue

A customarily brief Q1 trading update from BIRG was released this morning. The performance was broadly in line with both management guidance and market expectations.  


NIM at 216bps (FY18 220bps, Q418 213bps) was in line with FY guidance (216bps), with Q119 adversely impacted by the transfer of UK credit card portfolio to AFS. Management expects Q219 NIM to improve slightly but planned 2019 MREL issuance will likely see H219 NIM offset this. Cost cutting remains very much on track, with Q119 operating expenses (ex-regulatory levies) -3.5% vs Q118, and suggesting the momentum seen in H218 (-1.5% h/h, -4.7% y/y) has broadly continued through into 2019. We would again note the contrast vs the rising cost pressures at AIBG.


Customer loans volumes were +2.7% or €2.1bn q/q to €79.1bn, although €1.5bn of this was due to the stronger sterling seen in Q1. The primary driver of underlying loan growth was another standout performance from the corporate business (€0.5bn), with Retail UK also chipping in. BIRG’s mortgage market share in Ireland starting the year slightly sluggish at 23%, implying c.€430m in new lending in Q1 given BPFI drawdown data. More helpfully, BIRG reported some positive momentum within the SME sector despite Brexit.


FLCET1 at end Q119 was 13.3%, from 13.4% at Q418, with organic capital generation offset by new lending and RWA growth, further investments in the transformation programme, IFRS 16 and a dividend deduction. The NPE securitisation executed after the Q119 end (which helped bring NPEs down to c.5.9% on a pro forma basis)  should add c.30bps, while the corporate loan portfolio acquired from KBC will cost between 5-10bps of CET1, leaving CET1 at c.13.5% on a pro-forma basis. Further NPE disposals via securitisation, including owner occupier home loans, may arrive in H219, and supports our expectation of NPEs falling below 5% of gross loans by year end. Overall, we should see little if any changes to the consensus outlook.


Irish Economy: Services PMI points to slower growth in activity 

The latest AIB Ireland Services PMI, released this morning, suggests that the rate of growth in activity for the sector has cooled to a three month low. The headline PMI moderated to 54.7 in April from the previous month’s 55.3 reading.


This latest above-50 reading extends the sequence of growth for the sector to 81 months. All four of the segments of the services sector that are covered by this survey (Business Services, Financial Services, TMT and Transport & Leisure) recorded positive momentum last month, led by the Business Services component.


New Order growth has, unhelpfully, slowed to a two-and-a-half year low. Some panellists indicated that Brexit had negatively impacted on sales (presumably due to a front-loading of orders ahead of the original departure date in March). Outstanding business rose modestly in April, although the rate of accumulation has eased to a 69 month low. Given that backdrop, we are unsurprised to see that the rate of job creation has cooled to a 13 month low.


The news appears to be neutral on the margin front. Cost inflation has moderated to its slowest in over a year, prompting a softening in the rate of output charge growth. Business confidence remains firmly in positive territory, with 38% of panellists expecting stronger activity over the coming 12 months.


Taken together with Wednesday’s Manufacturing PMI report, these releases point to slightly weaker expansion at the start of Q2. Indeed, the composite PMI has moderated to a three month low of 53.4 in April, versus March’s 54.1 reading. As we have repeatedly noted, how political developments at Westminster pan out over the coming months will likely prove pivotal in terms of whether or not the trends indicated by the PMIs will be reversed.


Irish Economy: Exchequer Returns weak in April but still ok year to date

Exchequer Returns released after the market close yesterday show a weak tax performance in April, with receipts -0.3% y/y and 6.2% behind profile (target) at €2.8bn.


Most tax headings were behind profile in April, with the main weaknesses being VAT (just €6m, -96.5% behind profile and -96.3% y/y) and Corporation Tax (-€56m, versus the profile of €54m and the €85m outturn in April 2018), in both cases the miss was due to higher than expected repayments. The April data bring the cumulative year to date tax performance to receipts of €15.6bn, -0.2% behind profile but still a healthy +5.7% y/y. For reference, the Department of Finance projected 5.2% growth in tax receipts when the 2019 Budget was released in October.


On the spending side, gross voted (discretionary) expenditures were +5.4% y/y (so, lagging the growth in tax receipts) but 0.7% below (lower than) profile at €20.2bn. Both current expenditure (€18.8bn vs €19.0bn profile) and capital spending (€1.4bn, €2m below profile) are lower than had been budgeted for. National debt interest costs are €32m or 1.2% below profile at €2.5bn and also -6.5% y/y, reflecting the refinancing of Sovereign debt at cheaper rates.


Excluding transactions with no general government impact reveals an underlying year to date deficit of €4.4bn, €42m or 1.0% better than had been pencilled in by the DoF for this stage of the year. Given the volatility in monthly numbers, we wouldn’t read too much into the April numbers specifically and would instead focus on the year to date numbers, which continue to show growth in tax receipts outpacing the increase in underlying spending. This supports our view that the State will run a second successive surplus in 2019.


Cairn Homes: High Court approves capital reduction 

The Irish High Court yesterday approved the group’s application to increase the distributable reserves of the company by €550m through the reduction of its share premium account, with this change effective immediately. Cairn Homes’ shareholders had previously approved the proposal at an EGM in February.


Having already signalled that it intends to commence regular dividends from FY19 earnings, this move will give Cairn the scope to initiate special dividends and/or share buybacks in due course. We forecast dividends to commence in FY19E with a pay-out of 50% of PAT (4.2c/share or 3.3% yield), rising to 60% in subsequent years (6.3c/share or 5.0% yield in FY20E and 7.1c/share or 5.6% yield in FY21E). However we still expect the group to end FY21E with a significant net cash balance (€173m) providing it with significant resources for additional returns to shareholders.


No rate change

The UK Monetary Policy Committee voted to maintain the Bank rate at 0.75%, as widely forecast. Minutes to the meeting showed that the decision was unanimous. Our own view was that one member might back higher rates. The two QE related aspects of policy (the stock of purchased gilts of £435bn and corporate bonds of £10bn) were also kept unchanged with 9-0 votes. But the combined tone of the minutes, Inflation Report (IR) and press conference was notably hawkish.


Stable global growth

In terms of the economy, the minutes were more positive over world economic prospects, stating that global growth had shown signs of stabilisation; that trade tensions between the US and China appeared to have improved; that financial conditions had eased ‘significantly’; and admitting that GDP growth in Q1 in the US and China had exceeded BoE expectations.


In the UK, the Bank said that it now expected the economy to have grown by 0.5% during the first three months of the year (in line with our view), compared with 0.3% at the previous meeting in March. However as Governor Mark Carney explained at the post-IR press conference, the difference was principally due to stock building effects in ‘no deal’ Brexit preparations – specifically, a greater than expected build-up of British inventories elsewhere in Europe and an unanticipated positive effect on UK distributive industries, such as warehousing.


Firmer UK growth

Overall the minutes concluded that the underlying growth of the UK economy had been firmer than expected i.e. abstracting from Brexit related developments. In terms of forecasts, the Inflation Report upgraded its GDP 2019 forecast to 1.5% from 1.2% in February. Projections for the two subsequent years were also pushed up, to 1.6% in 2020 (was 1.5%) and 2.1% in 2021 (1.9%). By mid-2022 the BoE’s baseline case is that the pace of activity will be running at an annual rate of 2.2%. Also excess demand in the economy is expected to be some 1% of GDP. This compares with an equivalent assessment three months ago of 0.75% and an estimate that there is currently economic slack of some 0.25%. The net result is that the unemployment rate falls to 3.5% at the end of the projection horizon.


One hike this year

It seems clear to us that were it not for Brexit uncertainty, the MPC would have raised rates again by now. It is not completely impossible that an agreement is pushed through rather promptly, resulting in a hike during the summer. However an expectation of a deal which avoids the UK fighting European elections on the 23rd of this month looks somewhat ambitious to us. But on the basis that an accord is settled in time for 31 October, we maintain our view that the committee will act in November. Dr Carney should get to raise rates again before he leaves the BoE in January next year. But a subsequent hike in 2020, which remains our central view, looks due to be left to his successor. 


Tories and Labour big losers, Lib Dems, Greens winners in UK council election

Just under half of the councils have been counted in the UK so far (110 of 248 councils declared), and as expected the election has taken a heavy toll on the Conservative party. The Tories have so far lost a whopping 427 seats, losing over 25% of their seats so far, and losing control of almost 40% of previously controlled councils. The Labour party are also performing poorly, a bad sign for a major opposition party, losing 58 seats so far. The results will likely deter either party from pushing for a general election at any stage in the near future.


It is the Lib Dems and Greens who have so far benefitted from the biggest jump in support. So far they have more than doubled the number of council seats, adding over 300 seats so far, to bring the total number of seats to 563. The Greens have also seen significant wins, adding 40 seats to the just 6 seats previously held. While the newly formed Brexit and Change parties did not field candidates, they will take hope from the outcome so far, as it suggest that they could benefit from Remain and Leave protest votes in the forthcoming European elections.


Economic releases

09.30    UK        Services PMI
10.00    EC        CPI (Apr)
13.30    US        Non-farm payrolls