Bank of Ireland, whose shares underperformed AIB and the wider European banking market last year as it repeatedly disappointed investors with its net interest income (NII) outlook, had some good news on that front on Tuesday.
The bank nudged up its full-year NII forecast by as much as €50 million to €3.3 billion, helped as it grew Irish loans and deposits by 5 per cent each.
The group also signalled that its net interest income will grow to more than €3.5 billion by 2027, as it benefits from financial contracts – known as structural hedges – to reduce its exposure to interest rate movement and a recent bond-buying spree.
It has increased its bond holdings, mainly European government bonds and mortgage-backed bonds, by €6 billion to €15 billion, as they become more profitable to parking excess deposits with the European Central Bank (ECB). The ECB deposit rate has fallen by half to 2 per cent in the past 13 months. German 10-year bonds, a European benchmark, are currently yielding 2.7 per cent.
Still, investors gave the bank little credit for this on Tuesday – with its stock falling as much as 5.7 per cent in Dublin – as investors baulked at a spike in bad loan provisions. It booked a €137 million impairment charge during the first half, up from €50 million a year earlier.
Much of this was down to growing risks in its US acquisitions finance business, which has been hit in recent times as borrowers are squeezed by rising interest rates and a slowing domestic economy.
The bank has cut the size of that loan book to $1.5 billion (€1.3 billion) from €2.4 billion in 2022. It also has a form of loan-loss insurance – known as credit risk transfer deals – on the portfolio. But it will have to stomach initial losses likely to come as some of the loans are restructured in a weakening economy. Chief executive Myles O’Grady said the group remains committed to this business, despite the current challenges.
He noted that the business has been “very stable” on the whole over the years, having come through more challenging periods, including the 2008 financial crash, the Covid-19 pandemic and recent inflation crisis. Bank of Ireland has been an active player in this market for the past 25 years, participating in syndicated loan deals with other lenders.
The €137 million loan impairment figure for the first half also includes a €40 million general provision to reflect “the evolving macroeconomic outlook” as the Trump administration’s trade policies act as a drag on growth internationally.
The higher-than-expected provision and €69 million restructuring charge for the first half – and suggestion that a similar amount will be taken in the final six months of the year – will likely see consensus profit forecasts fall in the near term, according to Christopher Cant, an analyst with Autonomous Research in London.
However, he said that medium-term consensus earnings estimates are likely to move higher as analysts grow more comfortable with Bank of Ireland’s NII forecast for 2027.