The share prices of the two largest Irish banks could double in the coming years, as they will be among the main winners across euro-zone lenders when central banks hike interest rates to fight soaring inflation, according to Deutsche Bank.
Analysts at the German investment bank have raised their AIB pretax profit forecasts for each of the next two years by about 40 per cent, to reach €1.45 billion in 2024, as they factor in the European Central Bank’s deposit rate swinging from minus 0.5 per cent to 1 per cent and the Bank of England’s main rate rising to 2 per cent from, currently, 1.25 per cent.
Financial markets are expecting more aggressive ECB rate increases, however.
The Deutsche analysts, led by Robert Noble, have increased their Bank of Ireland pretax forecasts for 2023 and 2024 by 21 per cent and 37 per cent, respectively, to reach €1.72 billion.
The earnings benefit will be driven by the banks no longer being charged negative rates for billions of euro of excess deposits they store with the ECB, rather than mortgage rate increases, they said.
The analysts see scope for both banks’ share prices to rise 50 per cent compared with their new, raised official price targets. However, they suggest that the stocks could actually double in value if the market grew to appreciate the lenders’ earnings potential and the level of excess capital they are holding.
“Upside is as high as 100 per cent,” they said. This would require European banking stocks to move off their current discount to their inherent value – and Irish banks to rally from their own discount to the sector, they said. That is even after Irish banking stocks have advanced this year to outperform the wider industry.
Deutsche estimates that AIB shares are trading at a discounted rate of about 60 per cent of its so-called tangible book value, based on earnings forecasts for this year, while Bank of Ireland is changing hands at a little over 70 per cent.
Why are stock markets so volatile right now?
“Irish banks are some of the most rate-sensitive banks in the euro area and it is vastly underestimated by consensus and valuations,” the Deutsche analysts said. “Substantial restructuring post real-estate crisis puts the banks in a relatively strong position in the face of economic headwinds.”
The earnings outlook of the three remaining Irish banks, including Permanent TSB, is also underpinned as they are preparing to carve up the loan books of Ulster Bank and KBC Bank Ireland as the two overseas lenders retreat from the Irish market.
“The balance-sheet structure of the Irish banks is substantially geared to rate rises – with AIB more sensitive than Bank of Ireland,” the Deutsche report said, noting that Bank of Ireland has a greater presence in the UK, where rate hikes have been factored in by the stock market to a greater extent.
Still, Deutsche estimates that the difference between Irish mortgage rates and the average rates across Europe will narrow as the domestic banks become more profitable in an environment of rising official rates. The average rate on a new home loan in the Republic was 2.77 per cent in April, which was 1.18 percentage points higher than the euro-zone average of 1.59 per cent.
