Bank of Ireland’s results something of a curate’s egg

Bank of Ireland’s results were something of a curate’s egg, which might explain the 3 per cent decline in its share price in early trading in Dublin.

As noted by analysts, the bank’s results beat consensus expectations with regards to revenue, the expansion of its net interest margin, earnings per share (2.3 cent versus 2.2 cent) and a fully loaded capital ratio of 12.3 per cent, up 100 basis points.

But there was disappointment that no dividend payment was announced, something that had been flagged a year ago. It hasn’t paid a dividend since the global financial crash in late 2008.

The bank made a pre-tax profit of just over €1 billion, which is not to be sniffed at when you consider that it only returned to profit in 2014 after several years of heavy losses post-crash.

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Bank of Ireland’s pre-tax profit last year fell by 16% to just over €1bn

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However, this profit was 16 per cent lower than in 2015 and there are a number of headwinds facing the business.

Not least of them is Brexit. Among the domestic Irish financial institutions, Bank of Ireland has the biggest exposure to the UK, with 40 per cent of its balance sheet based there. Currency fluctuations impacted its income last year.

Sterling level

At a sterling level, profits in its retail UK business declined by 24 per cent to £106 million.

It has 3 million customers in the UK, which is more than the adult population of Ireland. But the bank is a small player in a highly competitive market and Brexit poses unique challenges for the group.

Rising costs are another headwind. The bank’s CEO Richie Boucher has signalled a spend of up €225 million annually from capital over the next four years on its IT infrastructure.

It’s a short-term drain that Boucher hopes will deliver a long-term gain by enabling it to compete effectively in a digital era.

The cost-income ratio for last year was 58 per cent, five points higher than in 2016 and still some way off its target of 50 per cent.

In terms of the underlying business, Boucher said he expects to increase new lending this year from the €13 billion it achieved in 2016. Lending in Ireland rose by 6 per cent to €6.7 billion.

Mortgage loans

This will include an uplift in mortgage loans in Ireland as the supply of new houses ticks up. The bank currently has a 25 per cent share of new mortgage lending, which Boucher indicated to analysts that he would like to nudge up.

He also spoke of the recovery in Ireland no longer being Dublin-centric, and spreading to the regions. Ireland is set to be the fastest-growing economy in the euro area for a third year running, supported by growth in consumer spending.

In terms of reputation risk, the tracker mortgage review continues to hang over the bank, as it does for its rivals. Boucher once again declined to comment on the likely cost to the bank, noting only that a figure of €25 million has already been booked.

He said about 600 customer accounts have been identified as having been denied a tracker rate. Where possible, these have been restored to the lower tracker rate.