Bank of Ireland’s interest income from loans declined in 2015 compared with the previous year, illustrating the difficulty banks face in growing profits.
Interest income was €3,269m compared with €3,432m in 2014. However, the bank also paid out less interest to depositors – €825m v. €1,111m - so net interest income improved by 5.3% year-on-year.
Operating expenses advanced by 6.9% to €1,823m. When trading from the bank’s insurance operation is factored in, BoI’s operating profit improved by 9.7% to €1,340m. The net outcome was €940m v. €786m. No dividend was paid to shareholders but chief executive Richie Boucher said the dividend will be reinstated in FY 2016.
Broker Darren McKinley at Merrion commented: “We assume investors who buy at the current price will be rewarded with a dividend of 5%+ in FY18. The resumption of dividends should help broaden the potential investor base. The investment case is further strengthened now that we expect their net loan book will grow again in FY16, having been contracting for a long period post the recession. We currently rate Bank of Ireland a ‘Buy’ with a December 2016 target price of 36c. Given the upcoming Irish election and UK ‘in-out’ referendum we expect continued volatility in Bank of Ireland’s share price.”
Boucher commented: “All of our trading divisions are profitable and contributed to our strong financial performance during the period. We continued to be the largest lender to the Irish economy and we are well positioned to meet credit demand which is recovering as the Irish economy grows and confidence returns."
In Association with
Gloomy Review
The Bank of Ireland share has plunged from 34c at the end of December 2015 to the 26c level now, wiping €2.5bn off the company's value.
Bank of Ireland is Ireland’s leading corporate and business bank and has the second largest market share in consumer banking. The Central Bank’s recent macro financial review paints a fairly gloomy picture of the short-term prospects for Bank of Ireland and other Irish banks.
The CBI review notes that the recovery in banks’ profits remains weak. “The improvement in profitability has been mainly driven by write-backs of impairment provisions, and the high level of impaired loans remains a challenge for the banking system,” says the CBI.
New lending, while increasing, remains at levels which are being offset by redemptions of existing loans. In the CBI’s view, the reliance on lower funding costs to support income growth is not a viable long-term source of earnings growth.
Challenges
“Despite some positive developments, domestic banks continue to face challenges in terms of developing business models that are capable of producing sustainable income,” states the review. “In an environment where profitability levels across the European banking system are weak, domestic Irish banks compare poorly when operating profit before impairment provisions is used.”
The CBI calculates that one-fifth of outstanding loans by value in domestic banks are non-performing, a high figure by international comparison. “In general, the necessity to set aside provisions for a substantial amount of NPLs hampers the ability of banks to supply credit to the real economy. The resolution of legacy arrears is a crucial determinant of the future performance of the domestic banks,” states the review.
Another factor weighing on sentiment towards Bank of Ireland is the possibility of the UK deciding to leave the European Union. In the worst case scenario, Brexit could have a “significant impact” on the Irish financial sector, the CBI warns.
Despite this negative mood music, house broker Davy predicts that growth in UK lending will result in overall net loan book growth in 2016. The broker’s ‘discounted fair value’ for BOI is 39.5c.
Photo: Richie Boucher (right) with CFO Andrew Keating (Pic: Naoise Culhane)
