19 Mar 2019

Irish Banks: Finance Ireland enters mortgage market

Alternative lender Finance Ireland has this morning launched its previously flagged residential mortgage market product. The product, which will be distributed via mortgage intermediaries (brokers), is centred around LTV variable and fixed rates and seems set to compete for prime borrowers and switchers in particular. 


Finance Ireland will offer residential mortgages of up to €1.5m with variable rates starting at 2.75% (LTV < 50%), with fixed rates (3 year, LTV < 50%) starting at 2.55%. Loan terms of up to 35 years, LTVs up to 90%, and fixed rate periods of up to 7 years will be offered.


Finance Ireland entered the mortgage market last year when it acquired the €200m Pepper Money home loans portfolio and distribution platform, but today’s announcement marks the non-bank lender’s proper launch into the €10bn (Investec’s new origination forecast for 2019) residential mortgage market. The rates and terms on offer from Finance Ireland are in our view quite competitive and will look in-line with AIBG on variable rates and Ulster/KBC on fixed rates, but we have not yet identified any USP from Finance Ireland and so borrower inertia will remain a challenge in attracting customers.


Finance Ireland has previously focused on SME, agri and car finance lending, and has total lending of approximately €700m. We see its residential mortgage lending product as designed to round out the product offering with a medium term IPO or trade sale potentially in mind.


AIB Group: More progress made, but at what cost (trajectory)?

We have a new note out on AIB Group this morning post-Irish bank reporting season.


We have made relatively immaterial tweaks to revenue forecasts (FY21E NII -1% vs prior, other income +1%) given rising volumes and stable margin outlook, but we increase operating cost assumptions more meaningfully (FY21E total opex +3.4%) given increased investment in technology capabilities and rising staff costs. We therefore cut FY21E PPOP by -6% and EPS by -3.5%. Additionally, despite the impairment backdrop remaining benign (write back in FY18 and we expect supportive credit conditions to continue this year), capital leakage in FY18 through very noisy net negative exceptionals and OCI valuation items, in tandem with regulatory capital headwinds, sees us cut excess capital assumptions and TNAV (FY21E -6.7% vs prior).


The capital distribution story moves a step closer with NPEs still on track for < 5% of gross loans and FLCET1 holding steady at 17.5%, and AIBG will continue to look very attractive to some investors given underlying earnings and capital generation capacity.


Irish Economy: Trade surplus jumps to a record €7.2bn in January

The initial Goods Exports and Imports data for 2019 from the CSO (released before the Bank Holiday) show that the seasonally adjusted trade surplus jumped to €7.2bn in January, a record both in seasonally-adjusted and nominal (€7.0bn) terms. This outturn was significantly above both December’s surplus and the average monthly surplus in 2018 (both €4.2bn). Seasonally adjusted exports climbed 6% m/m to a record €13.7bn, while imports of €6.5bn were -25% from December’s unusually large total.


PMI data had pointed to a nervy start to the year on the export front, particularly given the Brexit-related uncertainties. In this regard, the strengthening in exports in January is somewhat of a surprise but seven of the nine major commodity groups posted y/y increases in January.


One area of the release that we are closely monitoring this quarter is exports to Great Britain. At a headline level, these were -2.0% y/y at €1.2bn, representing 9% of total goods exports. We had been expecting to see evidence of inventory build in areas such as Food (up 4% y/y to €307m) and Medical/Pharma items (-36% y/y to €181m and -12% on the average monthly total during 2018), although this phenomenon may be more evident when the data for February and March are released.


While global growth expectations have been pared, they remain comfortably in positive territory, which should underpin another year of progress for Irish exporters, conditional of course on no adverse Brexit developments. 


Irish Economy: Planning Permissions jump in 2018

Planning Permissions data from the CSO (released before the Bank Holiday) show that permission for 29,243 dwellings was granted in 2018, representing an increase of 41% y/y, although Q418’s total of 6,682 units was -3.6% vs. Q417.


This is the highest annual outturn since 2009 and is a very welcome sign, not least given the chronic undersupply of residential property across Ireland’s major urban centres (in particular). Nonetheless, we would caution against expectations that this could translate into a step-change in output from 2018’s 18,072 new build due to constraints such as labour (construction industry employment, at 145,500, is lower than it was in 2000) and capital (the stock high street banks’ lending for residential development and investment has fallen by 89% since 2010). The timing of some of these permissions are likely to have been influenced by tax considerations (both the vacant site levy and a CGT ‘holiday’) and/or changes to the planning regime (‘fast track’ applications for scale developments of 100 or more units).


Our forecasts assume residential completions of 24,000 this year and 30,000 next year, the latter bringing output to the low point of the range of estimates (30,000 – 50,000 per annum) of the ‘flow’ of new household formation in Ireland. In addition to this flow, there is also a meaningful ‘stock’ of unmet housing need.


UK this week

Against the ever shambolic Brexit background in which we go into more detail in our ‘Thought of the day’ below, the BoE MPC’s policy decision is due on Thursday at midday. This looks set to keep the Bank rate firmly on hold at 0.75%. Indeed the committee is very unlikely to raise rates again until it has a clearer line of sight on Brexit. It is also a bumper week for key UK indicators, which under ‘normal’ circumstances, markets would scrutinise carefully. These include labour market data; the CPI; retail sales and the public finances. We strongly suspect that these will not cause a visible shift in the market dial, even if they are some way from consensus.


US this week

A more significant central bank announcement takes place on Wednesday in the form of a decision from the FOMC. Clearly the Fed funds target range is set to remain at 2.25%-2.50%. A key will be to gauge the extent to which the Fed is ‘patient’, to glean any clues on balance sheet runoff in Jerome Powell’s press conference and the shape of the ‘dot plot’. We still foresee one further 25bp hike in Q3. By contrast the curve suggests a 30% chance of a cut by end-year. The US also sees a few important indicators including the Philly Fed index and ‘flash’ PMIs for March.


Europe this week

Survey evidence tops the bill in the Euro area on Friday with the ‘flash’ PMIs for March. February’s (final) composite numbers showed a strengthening to 51.9, its first increase for seven months. Various industrial production figures over the past week or so have beaten expectations by a wide margin and although those specifically relate to January, we are interpreting these as potential straws in the wind, as various negative idiosyncratic factors begin to unwind. Our forecast is for another rise in the index, albeit a modest one, to 52.1. The ECB’s Economic Bulletin is often worth a read – March’s is due on Thursday. We also have the EU Summit beginning Thursday, which will be keenly watched from a Brexit perspective. 

ROTW this week 

As always, a critical driver in risk asset markets is the trade talks between the US and China. Over the past 2-3 weeks, the direction of travel has been positive. However, more recently it seems as though an accord has become more difficult and the prospect of a Trump/Xi meeting this month to sign off a deal has become more distant. We await any relevant updates. Last, policy decisions from both the SNB and the Norges bank are due on Thursday.


Thought of the day

10 days to go 

The big news yesterday was that House of Commons Speaker John Bercow would not allow a third “meaningful vote” to take place, unless it was on a proposal that was substantially different in nature to the previous version.


Following this, there is much confusion on what the government’s next steps will be, with Downing Street having made clear that it was blindsided by Mr Bercow’s move. It is taking legal advice to look at its options, but with the EU making clear negotiations over the deal have now ended (and therefore the scope for a meaningfully different version to be presented at this point), there is little hope Mrs May will be able to find a way to hold a third vote this week. The government is busy preparing for the EU Summit Thursday/Friday at which it is expected to formally request an extension. It is being reported in The Sun that this would be a 9-12 month extension, though the EU may well push back, looking for a longer period to allow a referendum (or other more substantial) changes to be made to the UK’s plans. Amidst talk of a lengthy extension, there are reports of further frictions between the PM and the Eurosceptic ERG amidst reports some Tory MPs could go on vote strike if a lengthy extension is pushed forward, raising the prospect of the government failing to pass any confidence test (motion) that is brought forward in Parliament.


As things stand at the moment, it does look as if the next concrete step from the government will be the formal Article 50 period extension request. No doubt we will hear much more from Brussels on the acceptance of this (and conditions that would be attached) on Thursday evening, if not before.