State may sell Bank of Ireland shares in 2017, Investec says

The State may sell down its remaining 14 per cent Bank of Ireland stake next year, even as the outlook for the group's interest margins is deteriorating, according to Investec.

A Bank of Ireland share sale would follow the government placing a stake in Allied Irish Banks in 2017, Investec analyst John Cronin said in a note.

While Investec does not see any new legislation on home loan pricing to be applied to force down standard variable rates, “we do believe material compression in mortgage rates will ensue,” said Mr Cronin, adding that Investec also has “concerns that banks will be pushed towards providing more generous debt forgiveness terms” for soured loans.

As such, Investec has cut its net interest margin forecasts for the next three years , which has driven a 0.5 percentage point reduction in its 2018 return on equity ratio forecast for Bank of Ireland, to 10.5 per cent. Return on equity ratios, or RoE, is a keenly-followed gauge of profitability for investors.

While Mr Cronin has cut his price target for the stock to 34 cents from 36, it implies considerable upside from where it is currently trading, at 26.2 cents.

Bank of Ireland is alone among the country’s bailed-out banks in avoiding state control during the financial crisis.

Meanwhile, Mr Cronin has slashed his price objective for Permanent TSB to €3.30 from €4.36, and lowed his RoE ratio to 6 per cent from 8 per cent.