29 Jul 2019

Irish Economy: Retail sales growth moderates in June

The latest retail sales data show a moderation in the pace of growth for the month of June.

Retail sales volumes were +1.2% m/m in June but just 0.1% higher y/y. However, the performance of the motor industry, in the last month of the “191” number plates, was a drag on overall performance. The index, which excludes Motor Trades, was +1.7% y/y, although this represented a third successive moderation in the annual growth rate and this index was -1.1% on a m/m basis. The sectors that have performed best over the past year are those that retail household durables (Electrical Goods +21.0% y/y; Furniture & Lighting +18.8% y/y) which may reflect increasing new housing output (+25% y/y to Q119). Amongst the sectors that recorded y/y declines are Department Stores (-4.1%), which perhaps reflects changing consumer spending patterns, and the aforementioned Motor Trades (-3.7%), which we suspect reflects the leakage of sales to imports priced in Sterling.

Notwithstanding sectoral differences, the latest data point to continued modest growth in consumer spending. 

Bank of Ireland – Can cost progress offset NIM headwinds?

A broadly in-line financial performance in H119, volumes possibly slightly weaker than expected but NIM better than some had feared. However, NIM guidance lowered and volume outlook is already softening. We make some cuts to revenue and earnings as a result.

Headline profit €315m and u/l profit €376m (H118 €454m and €500m), supported by modest loan book growth (net loans +1.4% y/y to €77.4bn), lower but in-line NIM (216bps vs Q119 216bps FY20 guidance 216bps FY18 220bps) and some valuation-led improvements to other income (NII -0.7% y/y but total income +0.9% y/y). Irish residential mortgage market share remaining slightly soft at 23%, SME credit demand remaining weak, but corporate and consumer lending both performing well. There was a net credit charge of €79m (21bps annualised), vs the €81m write-back in H118 (but somewhat flagged by management as the cost of risk normalises). The big negative will be the lower NIM guidance, as management now look for a lower H219 result given the weaker yield environment seen in recent months. 

Further, it now sees FY20-21E NIM trending “mid-to-high single digit bps lower”. This is not wholly unexpected, and is a broad sectoral issue, but it may not have been fully priced in by the market yet so there are likely to be some downgrades. Positives centred on issues within management’s control, as costs remain on their firm downward trajectory, -3% y/y and -1.75% h/h (ex-regulatory levies) at €903m, with staff costs -5% y/y despite wage pressures. We expect this pace of cost reduction to continue in H219. Exceptional costs were reasonably well behaved at €61m, mainly from customer redress and business restructuring (staff redundancies). Capital buffers continued to expand, as organic capital generation of 90bps and the NPE securitisation is unlocking of 30bp saw FLCET1 grow by 40bps over the period to 13.6%, even after a 20bps dividend accrual, 25bp apportioned to the transformation programme investment, and 30bps for RWA growth. NPEs reduced further by 100bps to 5.3%. 

The refocusing of the UK business continues, with the credit card portfolio disposed of earlier this month, and the Group now announcing that it will close its current account proposition and a portion of its ATM network in the UK. 

The cut to NIM guidance is a reflection of the lower yield environment and the revenue headwinds facing the entire Eurozone banking sector. It should therefore not be wholly unexpected. We look to internal self-help initiatives on costs and UK division strategy as value differentiators amid a difficult sectoral backdrop. Management call at 8.30am.

US this week

The main focus for markets this week will be the FOMC meeting on Wednesday. Our forecast is that policymakers will opt for a 25bp cut and beyond this we judge that we will see two further 25bp reductions, one as soon as September and a subsequent move in Q1 2020. Note also that senior members of the US administration are set to travel to Beijing for the first face-to-face talks since agreeing to restart trade negotiations, we have a more detailed note on this below in our ‘Thought of the day’ piece. 

US data this week starts with PCE inflation and Conference Board consumer confidence figures on Tuesday. This will be followed by the ADP figure on Wednesday, which will be taken as a steer for Friday’s jobs report. Our forecast for the main employment data on Friday is for a payrolls gain of 180k and a steady unemployment rate of 3.7%. In addition, the ISM manufacturing print is due Thursday.

UK this week

Growing fears of a no-deal Brexit have seen sterling weaken further over the weekend, with the pound now trading at just $1.2367 against USD. 

Sentiment has been dampened after Michael Gove said that the government is now “working on the assumption” that the UK will leave the EU without a deal on 31 October. Note that later today he will chair today’s inaugural Brexit ‘war Cabinet’ (aka. XS) in the Prime Ministers absence. The XS, or the ‘exit strategy committee’ to give it its formal name, is a group of six senior Cabinet ministers who will meet twice weekly on Mondays and Thursdays to take crucial Brexit decisions. All the while, a number of rebel MPs have sounded demoralised since the appointment of Boris Johnson as Prime Minister. 

This morning, Reuters reports that Sir Oliver Letwin MP has warned that “we have to accept that we may find ourselves leaving without a deal”.

Europe & ROTW this week

Last Thursday, the ECB left its key policy rates unchanged but hinted that easing is likely to come in its September meeting after adjusting its guidance and tasking committees to reappraise the limits of is monetary policy toolbox. 

Key releases for the EU19 this week include the ‘preliminary flash’ estimate for Q2 GDP, which we forecast will show growth halving to 0.2% (q/q) from the 0.4% seen in Q1. National GDP and ‘flash’ HICP releases are sprinkled across the week, while the final manufacturing PMIs will be released on Thursday. 

In Asia, we are set to see the official PMIs released on Wednesday followed by the Caixin manufacturing PMI on Thursday. Japanese industrial production for July will also be closely watched on Tuesday.


US-China trade talks

Senior members of the US administration are set to meet with a Chinese trade delegation in Shanghai tomorrow for the first of two days of negotiations. However, Reuters reports that expectations going into the talks are low from both sides’ perspectives. 

Hopes are that Washington and Beijing will at the very least detail commitments for “goodwill” gestures that would clear the path for future negotiations. These would include Chinese purchases of US agricultural goods and Washington allowing firms to resume some sales to China’s Huawei. 

Further dampening sentiment have been comments from President Donald Trump on Friday, who stated that he believed Beijing may not want to sign a trade deal until after the 2020 presidential election in the hope they would be able to secure more favourable terms from a Democratic president. 

Overall, there is little evidence that a prompt de-escalation is forthcoming in the US-China trade dispute.


Economic Releases

Nothing to note.