26 Jul 2019

Dalata: North American tourist market strong in H1

Overseas residents’ trips to Ireland totalled 1.06m in June, a 3.4% increase y/y. 

Total trips to Ireland reached 5.05m in the first six months, a 3.6% increase on H118 and the first time the 5 million mark has been exceeded in H1. 

The main source of growth in June was again in the North American market with visits by US and Canadian residents +9.1% y/y to 300,900. Remarkably, this sum was only 10,800 behind the total number of visits by British residents in the month, which declined 1.1% y/y. All geographic segments posted y/y growth in the first half of the year with visitors from US/Canada also +9.1% y/y in the period (and accounting for 22% of the total), GB residents’ trips +0.5% y/y, European (ex. GB) residents’ trips +2.9% and visitors from Other Areas (mainly Asia-Pacific) +8.1% y/y. 

Following a record-breaking year for tourism in 2018 when visitor numbers grew by 6.9% and passed 10 million for the first time, the data for H1 this year show a more modest pace of growth. Nevertheless, strong growth in the North American market is very positive for the hospitality industry given the typically longer duration of such visits and the higher propensity of such visitors to stay in hotels. 

Irish Banks: AIBG - Disappointing H119 on costs, TRIM, exceptional charge

AIB Group H119 interims - bit disappointing overall on higher costs (wages), sizeable exceptional cost (trackers), and a high initial TRIM estimated impact (we've warned about the risks from all of these previously). Margins and volumes look okay but are experiencing some well-discussed headwinds, while NPEs continue lower but maybe losing some organic acceleration in Q2. 

In terms of financial performance, PBT €436m (PBT pre-exceptional items €567m) compares against H118 €762m/€776m, with NIM 246bps (FY18 247bps), and NII €1,050m (H118 €1,049m). Other income was in line with H118 at €319m (H118 €322m) with fee income performing well. Operating expenses were +6% y/y to €744m (mainly staff costs, +8% y/y), and a large exceptional cost of €131m related mainly to restitution costs and provisions for regulatory fines from legacy issues (trackers presumably). A net credit impairment charge of €9m (H118 €142m write back) was perhaps lower than consensus given prior outperformance here but management have flagged a normalisation of this for some time in fairness. 

FLCET1 17.3% (FY17.5%, Q119 17.3%) and initial TRIM discussions with ECB indicate a 90bps hit to capital via €2bn increase in RWA, which is probably slightly higher than consensus expectation (no guidance given prior to this). Total new lending in H119 of €6.0bn +8% y/y with new mortgage lending of €1.3bn +8% y/y and mortgage market share 31% (FY18 32%). Personal/consumer lending strong, but SME and corporate lending a bit softer. Performing loan book increased €1.2bn h/h to €58bn, with overall net loan book marginally higher h/h at €61.1bn (FY18 €60.9bn). NPEs decline 22% h/h to €4.7bn (FY18 €6.1bn, Q119 €4.8bn), now 7.5% of gross loans. 

Overall, a bit disappointing relative to market expectations, but capital buffers remain sizeable and income/capital distribution potential remains strong going forward. Management call at 9am, focus may shift to capital distribution potential.

No change, but plenty of signals

As widely expected the ECB did not make any changes to policy in their announcement yesterday, however the ECB’s communications pushed the door wide open for further easing through a range of measures when they next meet on Sept 12. 

The biggest change was the expectation for rates to remain “at their present levels or lower at least through H1 2020”. The governing council expressed that it was “ready to adjust all of its instruments”, specifically mentioning that it was looking at options including reinforcing its policy guidance, tiering of the deposit rate and the size and composition of the asset purchases. In his press conference, Draghi indicated that all of these options could be discussed at the September meeting. 

Another key change was regarding the 2% inflation target. Mr. Draghi told the press conference that they could view the inflation target of 2% as symmetric, removing the reference to the target as being “close to but below 2%”. This indicates that the ECB may seek to promote a period of above target inflation to catch up for the past period of missed targets.

Dovish but not enough

We see the steers provided by the ECB President today as consistent with our view that the ECB will look to ease the stance of policy in September. Interestingly, we note that in previous instances where the deposit rate has been lowered, such easing has been accompanied with other forms of policy accommodation being added. Disappointingly, however, President Draghi would not be drawn on the likelihood of any particular easing route, but instead talked about optionality.


Investor expectations had been set up ready for Mr. Draghi to lead markets in the direction of forthcoming easing. In the absence of sufficient detail on the shape of this, after a roundabout trip, the euro ended stronger after today’s decision and press conference had been fully digested.

Fed action more certain

With seven weeks until the ECB next meet, the focus very quickly turned to the Fed, who meet next Wednesday (31 July 7pm). 

Interest rate markets have fully priced in a 25bp cut and even point to around a 20% likelihood of a bigger 50bp reduction. This is slightly irregular as July isn’t considered a “major” meeting, and will therefore not include updated economic projections or rate forecast (dot plot). While policy action in a non-major meeting is rare, expectations are so high for a hike, the Fed will be wary of disappointing markets, not to mentioned President Trump, who has been piling pressure on Powell and co. since the turn of the year. Market watchers will be keen to gauge from Powell’s comments whether the rate cut is a one-off so called “insurance cut”, or one of a series of cuts indicating a paradigm shift in Fed policy. 

Considering the relative solidity of the domestic economic backdrop and the range of opinions on the FOMC, we judge that a 50bp policy adjustment is not likely next week. One major factor for this view is that James Bullard, the lone voter for a rate cut at the June meeting is still only calling for a 25bps cut. Beyond next week, our judgement is that we will see two further quarter point interest rate cuts, one as soon as September and a subsequent move in Q1 2020.


Barnier draws battle lines as Boris sticks to Brexit plan

Boris Johnson’s first statement to parliament as PM was typically colourful, boastful and blustering, a world away from his predecessor. The new PM has remained consistent in his message that he plans to leave the EU on 31 October with or without a deal. To that end, he highlighted that no-deal planning would start immediately and be one of the highest priorities. 

While he has stated that he would prefer to reach a deal, he made it clear that May’s deal was dead, and that the “Irish backstop must be abolished”, and was not acceptable even if softened by the inclusion of a time limit. Following similar comments in his welcoming speech, and an appointment of cabinet positions heavily weighted towards brexiteers, Boris’s plan to adopt a tough stance towards Europe is clear. 

This hasn’t gone unnoticed in Europe as chief negotiator Michel Barnier sent a message to EU diplomats in reaction to Boris’ comments. He characterised Boris’ speech as “rather combative”, and suggested that Boris’s prioritisation of a no-deal was “partly to heap pressure on the unity of the EU27”. He urged EU leaders to remain calm, “stick to our principles” and show “solidarity and unity” and stated that the elimination of the backstop was unacceptable to the EU. 

Overall, it was a measured response to the new UK PM’s comments, and the reiteration of the importance of solidarity will be welcome in Ireland, but it seems clear that there is a significant gap in the negotiating positions, which will be hard if not impossible to bridge in such a short time period before the October deadline.

Economic Releases

13.30    US   GDP Q2

13.30    US   PCE (inflation) Q2