Bank of Ireland pension gap seen nearing €1.5bn by JP Morgan

Bank of Ireland’s pension deficit is likely to swell to almost €1.5 billion by the end of this month, casting further doubt on the lender’s ambition to start paying dividends early next year, according to US banking giant JP Morgan.

Shares in the bank fell 1.15 per cent on Thursday to 19 cents after JP Morgan downgraded its recommendation on the stock amid additional concerns over the group’s lending margins and ability to grow its loan book.

JP Morgan analysts cut their stance to underweight, the equivalent of advising clients to sell, from neutral, which is similar to a hold recommendation.

Led by chief executive Richie Boucher, the bank warned last month that it may delay its planned return to paying dividends early next year as the UK's vote to quit the European Union impacts business sentiment. The UK accounts for about 40 per cent of the group's loan book.

Income

The bank’s net interest income fell 7 per cent in the first half to €1.14 billion, as its net interest margin, the difference between the average rates at which it borrows and lends on to customers, contracted to 2.11 per cent from 2.21 per cent a year earlier.

Its pension deficit swelled to €1.2 billion at the end of June from €740 million in December, partly due to falling bond yields. JP Morgan sees the gap expanding further by the end of September, to €1.47 billion. The US bank said the shortfall could exceed €1.5 billion under a more adverse scenario.

Meanwhile, JP Morgan does not see Bank of Ireland’s loan portfolio growing in the medium term.

Loans

The Dublin-based bank’s loan book, net of provisions set aside for bad loans, shrank to €80.2 million in June from €84.7 million in December, as a weakening of the sterling following the UK referendum impacted the value of its loans on the other side of the Irish Sea.

JP Morgan sees continuing pressure on the bank’s net interest margins amid rising competition in the mortgage market.

“We are cautious on Bank of Ireland’s revenue growth in the medium term and forecast it to decline 9 per cent during 2015 and 2018” to €2.99 billion, it said. It does not see the bank restarting dividends, which have been scrapped since 2008, until it reports 2017 results in early 2018.