Bank of Ireland’s dividends return seen at risk on Brexit

Bank of Ireland’s planned return to paying a dividend next year for the first time since 2008 is seen as being at risk as Brexit rattles investors in the Irish bank most exposed to the UK market.

The bank said in February that it aims to recommence shareholder payouts early next year with a “modest” initial dividend on the bank of 2016 earnings. Analysts had broadly expected the bank to start off by paying 20 per cent of its profits to shareholders, rising over time to 50 per cent.

However, shares in Bank of Ireland have plunged 38 per cent to 17 cent since it emerged on Friday that the UK, which accounts for more than two-fifths of the bank's loan book, is hurtling towards the EU's exit door.

Analysts have since started to cut their forecasts for the bank amid concerns over a UK recession, an Irish slowdown and a fall in the value of sterling against the euro. Some have also warned the bank’s pension deficit, which stood at €900 million in March, is set to widen.

"Bank of Ireland's management team is very keen to reinstate its dividend policy now that the bank has returned to sustainable profitability and our base case is that they will pay a dividend for 2016's financial year, but have reduced our dividend pay-out ratio assumption to 15 per cent of earnings [from 30 per cent]," said Stephen Hall, an analyst with Cantor Fitzgerald in Ireland.

“However, Brexit is obviously a huge unwanted development and, given the uncertainty associated with the vote, management may prefer to hold excess capital on its balance sheet.”

Another analyst, who declined to be named, said: “In an environment where you have a huge amount of uncertainty, the bank’s board and regulators may take a very conservative view on capital and hold off on a return to dividends for the time being.”

Bank of Ireland declined to comment.

Profitable

Analysts from Davy to Keefe Bruyette & Woods, which has cut its Bank of Ireland earnings forecasts for this year and next by an average of 10 per cent, said, however, the lender will remain well capitalised as it continues to be profitable.

"Things have moved a lot since Thursday and could move even further by the time they come around to paying any dividend next year," said Daragh Quinn of KBW in Spain, who has downgraded his Bank of Ireland's stock rating to the equivalent of hold. "The risks are to the downside for market forecasts for the Irish banks."

Meanwhile, Italy, which failed to gain EU approval for a bad bank just months ago, is reportedly considering ways to inject up to €40 billion into some of its banks after Brexit.