Successor to McDonagh’s Bank of Ireland faces decisive challenge of capitalizing on real growth from KBC windfall
Bank of Ireland boss Francesca McDonagh unveiled her farewell results on Wednesday.
It showed Ireland’s biggest bank recorded what it called an ‘underlying pre-tax profit’ of €419m in the first six months of the year, down 10% compared to the same period in 2021.
When we look at the statutory accounts of the Bank of Ireland, the picture that emerges is even more pessimistic.
Market turmoil in the first half resulted in investment losses of €1.47 billion compared to gains of €614 million in the first half of 2021.
Between jigs and reels, Bank of Ireland recorded a pre-tax profit of 335 million euros, down 17% from the 406 million euros it had raked in a year earlier.
Business lending, particularly in the SME sector, was also well below what one would expect.
Davy analyst Diarmaid Sheridan warns against reading the investment loss figure too heavily.
Russia’s invasion of Ukraine last February wreaked havoc on investment markets. It is this turbulence that is reflected in the figure of 1.47 billion euros.
“When returns deviate from the long-term average, life insurers need to take this into account,” he says, observing with considerable understatement that life insurance accounting can sometimes be “quite strange”.
However, even when this issue is ironed out, Bank of Ireland’s Wealth & Investment division went from an intrinsic value profit of €68 million in the first half of 2021 to a loss of €71 million this time around. this.
Market turmoil also dampened the performance of Bank of Ireland’s Corporate & Markets division.
While the division’s operating profit fell only 4% to 411 million euros, a 115 million euro recovery in loan loss provisions, a 40 million euro reversal in the first half of 2021 to an impairment of 75 million euros for the same period this year, means that the underlying contribution fell by 37% to 250 million euros.
This contrasts with the retail division in the UK where the restructuring of recent years (the Bank of Ireland moving away from low-margin generic mortgages in favor of higher-margin bespoke home loans) finally seems to be paying off – with an underlying contribution up 25% to €198m.
However, it was the performance of Bank of Ireland’s core Retail Ireland division, whose underlying contribution rose 37% to 246 million euros, that spared McDonagh’s blushes.
While operating profit actually fell by 1 pc, loan reversals of €36 million, compared to a depreciation of €47 million last year, made a better contribution.
The latest results show “underlying profit before tax” of 419 million euros in the first half, down 10% compared tothe same period in 2021
Like AIB, which released its interim results five days earlier, Bank of Ireland appears to be struggling to grow its loan book organically.
While McDonagh said: ‘We continued to support the Irish economy with £3.8bn of new lending to our retail, business and corporate customers, up 21% from H121’, the reality is a bit more nuanced.
The Bank of Ireland’s total loan book actually shrank by a further €1.7 billion, or more than 2%, to €76.6 billion in the first half of 2022.
Even the Retail Ireland division only managed to increase its loan portfolio by a barely detectable percentage to 32.4 billion euros.
All of this begs the question: with the Bank of Ireland itself predicting GDP growth of 7.5% this year and inflation approaching 10%, and with nominal GDP growth (real growth plus inflation) likely to be well above 15% in 2022, if the Bank of Ireland cannot increase its loan portfolio now, when can it?
Sheridan believes that this failure to grow the loan portfolio is primarily due to lack of demand.
With new home construction stalled at around 20,000 over the past three years, well below the underlying need for new homes, and the number of second-hand homes coming onto the market also abnormally low, demand for loans mortgages has been artificially depressed.
Business lending, particularly in the SME sector, was also well below what one would expect.
Business confidence had only started to recover from the crash of 2008 when Brexit hit in 2016. Then there was the pandemic in 2020 and Russia’s invasion of Ukraine.
“The outlook for credit growth is very positive”
“The housing market in Ireland has a lot of pent-up demand. Since Brexit, SMEs have accumulated huge deposits and their borrowing has been very low.
“There is extreme caution [among SMEs]. This lack of certainty for businesses has held back credit growth,” he says.
New home construction is soaring with completions up 44% in the first quarter and 53% in the second quarter, while supply in the new and used housing markets finally begins to catch up with the request – there were nearly 15,000 properties listed on myhome. i.e. last week, the highest since the pandemic.
So, does Sheridan think new mortgages will now follow?
“The outlook for credit growth is very positive,” he said.
That may be the case, but the three Irish banks, including Bank of Ireland, are taking advantage of the flight of foreign banks to grow their loan portfolios through acquisition rather than relying exclusively on organic growth.
While AIB and Permanent TSB share Ulster Bank, Bank of Ireland takes over most of KBC Bank, including its successful mortgage portfolio of 9 billion euros and 4 billion euros in deposits. This transaction will increase Bank of Ireland’s Irish loan portfolio by nearly 30% in one fell swoop.
McDonagh, who is leaving Bank of Ireland for Credit Suisse next month, describes the KBC acquisition as “a once-in-a-generation opportunity”. It will be up to his successor to try to extract organic growth from the larger bank.
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