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Dividends bonanza at Bank of Ireland offset by money set aside for potential loan losses

Chief executive lives up to pledge not to hoard excess capital

Bank of Ireland chief executive Myles O'Grady: 'I think as banks distribute more, that’ll have a positive impact on share price performance.' Photograph: Nick Bradshaw

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Joe Brennan
Mon Feb 26 2024 - 19:49

Myles O’Grady, presiding over his second set of annual results as Bank of Ireland chief executive, has lived up to his pledge that he has “no desire to hoard” excess capital on the group’s balance sheet.

The bank revealed on Monday that it plans to pay €634 million of dividends in the coming months and spend a further €520 million buying back its own stock, as it sticks to a target of keeping equity capital reserves at more than 14 per cent of what are known as risk-weighted assets.

The total distribution plan amounts to €1.15 billion and is up from the €320 million divvied out last year. Bank of Ireland retains a capital ratio – known as a common equity Tier 1 capital level – of 14.3 per cent even after accounting for the distributions.

The dividend itself equates to 40 per cent of net income, a target O’Grady had only expected to reach on the back of 2024 earnings.

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However, the problem for O’Grady is that the bonanza had almost been fully offset by some €1.05 billion being wiped off the bank’s market value as of midday, as the market digested news that the bank has set aside a greater-than-expected provision to deal with potential loan losses and guided down analysts’ estimates for the current year as central banks prepare to cut interest rates.

The bank’s net profit of €1.6 billion for 2023 – while up 86 per cent on the year as the bank raised interest rates on loans at a faster pace than deposits as the European Central Bank hiked official borrowing costs – fell short of a consensus forecast of €1.76 billion among analysts.

Although net interest income rose 48 per cent to €3.68 billion, it was 1 per cent lower than an excited market had priced in. But the main negative surprise was that the bank had taken a €403 million impairment charge for potential loan losses – particularly in relation to commercial real estate – even as the bank’s non-performing loans ratio dipped last year and is expected to decline further in 2024.

“Firstly, on a macro level, we believe there is potential for commercial real-estate values to fall by 10 per cent. We’ve captured that in our impairment charge,” O’Grady told reporters. The bank has also “tried to get our arms around future risks” by adding an additional layer of rainy-day provisions – or what are known in regulatory jargon as post model adjustments – given wider economic uncertainty.

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Bank of Ireland has also signalled that its net interest income for this year will decline to €3.45 billion – and come in well below the consensus figure of €3.66 billion that analysts had expected.

Part of this is down to the bank forecasting a faster pace of European Central Bank (ECB) rate reductions this year than financial markets are expecting. It is also due to a move to shift €1.1 billion of UK personal loans into a non-core portfolio.

What the market needs to see is that banks are not just generating strong returns, but that they can also distribute them back

—  Myles O’Grady, Bank of Ireland

This will see the interest on these loans – currently running at a rate of €80 million – not being included in the group net interest income figure.

The outlook implies an underlying pretax profit of €1.86 billion for this year, which is below the consensus estimate of €2.04 billion.

The results for this year could also become slightly noisier if UK financial regulators slap a fine on Bank of Ireland as part of an industry-wide investigation into historical commission rates in the motor finance market. Bank of Ireland’s Northridge unit wrote about 2.6 per cent of this type of business in the UK last year.

The slump in the share price on Monday hasn’t escaped the chief executive.

“I think investors know that banks are now generating sustainable returns, against a period when they were not – for reasons [such as] low interest rates and credit demand. What the market needs to see is that banks are not just generating strong returns, but that they can also distribute them back,” he said.

“I think as banks distribute more, that’ll have a positive impact on share price performance.”

Bank of Ireland shares are currently about 25 per cent below their peak last March.

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