Bank of Ireland shares drop as profits miss estimates

Underlying pretax profits at the group declined to €935m

Bank of Ireland said it plans to increase the dividend it pays to shareholders. Photograph: Dara Mac Donaill

Bank of Ireland said it plans to increase the dividend it pays to shareholders. Photograph: Dara Mac Donaill

 

Shares in Bank of Ireland fell by as much as 8 per cent on Monday as the group’s profits declined more than analysts had expected last year. Its lending margins also shrank and chief executive Francesca McDonagh predicted they would contract further in 2019.

Still, the group made some headway on its plan to reduce its costs by 10 per cent by 2021 by reducing its workforce by 525 jobs, or 5 per cent, to 10,892 at the end of December, it said in its annual report.

Underlying pretax profits declined by 13 per cent to €935 million as its net interest margin – the difference between the average rate at which it funds itself and lends on to customers – narrowed to 2.2 per cent from 2.29 per cent. The company saw its margin, hit in 2018 by “intense and persistent” mortgage-rates competition in the UK, tightening to 2.16 per cent this year.

“Underlying pretax profit was slightly lower than consensus,” said Owen Callan, an analyst with Investec Ireland, noting that the market had expected a figure of €956 million.

Shares in the bank rallied off their early morning lows to eventually close in Dublin down 2.3 per cent at €5.10.

The margins outlook took the spotlight off Bank of Ireland’s plans to increase its dividend, after reporting its net loan book expanded for the first time since the onset of the financial crisis, and that its non-performing loans declined by 24 per cent to €5 billion.

The lender plans to hike its shareholder payout to 16 cent per share from 11.5 cent on 2017’s earnings, which marked its first dividend in a decade. Customer loans amounted to €77 billion, reflecting net new lending off €1.3 billion.

“We have grown our loan book with net lending of €1.3 billion in 2018 as we support our retail and corporate customers across all our markets,” said Ms McDonagh. “This inflection point represents growth for the first time in a number of years and we are confident of further growth.”

The group’s non-performing loans (NPLs) ratio now stands at 6.3 per cent, the lowest among Irish bailed-out banks. Ms McDonagh reiterated that the group continues to have “all options” on the table, when asked if she would sell NPLs. The focus is on buy-to-let mortgages in the Republic, she added. Last June, Ms McDonagh laid out a series of targets, including plans to grow the bank’s loan book by 20 per cent and lowering its cost base by the end of 2021, while spending a total of €1.4 billion on an information technology (IT) overhaul and restructuring.

“We reduced our operating expense by 3 per cent [in 2018], a first step towards fundamentally improving the group’s efficiency while still investing in our business,” Ms McDonagh said. “Our systems transformation has made good progress with the testing of our first customers on the new banking platform.”

Bank of Ireland also flagged last June that it may sell its €600 million UK credit cards book net of provisions. Chief financial officer Andrew Keating told analysts on a call that he expected the portfolio to be off-loaded by the end of this year.

Ms McDonagh added that Bank of Ireland was “Brexit ready” and that it has “taken steps to manage an all-weather Brexit”.

While Bank of Ireland said in its 2017 annual report that it would be consulting with shareholders on plans to reintroduce executive bonuses for the first time since the banking system nearly collapsed more than a decade ago, its latest report said this work was ongoing.

“Any potential incentive scheme design will be subject to removal of relevant restrictions and shareholder support,” it said.

Ms McDonagh received €958,000 last year, including a salary of €950,000. Chief financial officer Andrew Keating was paid €551,000, the same level as a year earlier, while Patrick Kennedy, who stepped up to the role of chairman on August 1st, received €238,000 compared with €126,000 in 2017, when he served as deputy chairman.

Currently, any bonus plan involving a bailed-out Irish bank is subject to a punitive tax rate of 89 per cent. While Minister for Finance Paschal Donohoe hired consultants last year to review remuneration across the sector, he said last month that he has no plans to lift bonus restrictions.

“We are not haemorrhaging staff, but retaining and attracting talent is becoming more difficult in our sector as a result of pay restrictions,” Ms McDonagh said, reiterating her call for a “normalisation” of remuneration in the industry.