Bank of Ireland shares soar as US bank pushes buy stance

Bank of Ireland shares soared on Thursday after Bank of America Merrill Lynch pushed its buy recommendation on the stock to investors, highlighting the lender's strong long-term prospects even as it struggles with Brexit, a weak sterling and widening pension deficit.

Shares in the bank surged as much as 9 per cent in Dublin before ending the session up 7.3 per cent at 19.1 cent.

"Our struggle with Bank of Ireland shares this year has been that the most obvious macro exposure to the group – Ireland – has delivered economically," BofAML analyst Alastair Ryan said in a report. "But this has been slow, again, to translate into lending growth."

While the Central Bank forecasts the economy will grow by 4.5 per cent this year, its latest figures show that loans by banks to Irish households declined by an annual 3.1 per cent in August, while those to companies fell by 6.5 per cent, continuing a trend that has been going on since the outset of the financial crisis.

“We believe disappointments in net loan growth are only a delay to what is set to be a long-lived outperformance [for Bank of Ireland],” the analyst said.

Bank of Ireland’s market value has fallen by more than 43 per cent so far this year, to €6.2 billion, weighed by the impact of Brexit and sterling’s decline against the euro, given that about 40 per cent of the group’s loan book is in the UK.

Market volatility

Chief executive Richie Boucher also suggested in July the prospect of the bank returning next year to paying a dividend for the first time since 2008 may be impacted by Brexit and a widening pension deficit.

The pension shortfall widened from €740 million in December to €1.2 billion amid financial market volatility following the Brexit vote and as corporate bond yields have continued to decline. BofAML expects that the gap widened further in the third quarter.

BofAML sees Bank of Ireland’s total customer loans falling to €83.4 billion this year from €90.6 billion in 2015, largely driven by sterling’s depreciation against the euro, before picking up to €85.4 billion in 2018.