AIB’s net interest income is set to slide 11 per cent this year, at almost twice the pace of the other two domestic retail banks, Deutsche Bank said in a report on Tuesday as it downgraded its rating on the lender’s stock.
Deutsche Bank analyst Robert Noble sees AIB’s net interest income falling to €3.63 billion this year from €4.1 billion in 2024, with growth in the bank’s loan book during the course of the year only partially offsetting the impact of falling interest rates.
AIB’s underlying pretax profit should fall almost 22 per cent this year to €2.05 billion, he estimates.
Mr Noble cut his rating on AIB’s shares to hold from buy, after the stock outperformed its Irish rivals and the wider banking sector by some margin over the past 12 months. AIB’s shares have advanced more than 27 per cent during the period.
Irish banks saw some of the largest increases in net interest income of the European banks as a result of the European Central Bank (ECB) hiking interest rates in the 15 months to September 2023, according to Mr Noble.
This has seen profitability among Irish lenders – measured as profit returns on tangible equity shareholders have in the banks – “reach the highest level” of all European banks Deutsche Bank analyses, he said.
Irish banks have less scope to reduce deposit rates than European peers to cope with the impact of the current cycle of the ECB cutting rates again. That is because Irish banks passed on less of the ECB rate hikes in recent years than banks across the continent, according to Deutsche Bank.
Still, he said Irish banks’ earnings will be cushioned somewhat from the full effects of ongoing ECB rate cuts as they have entered into so-called hedging contracts with international institutional investors to reduce risks from a lower interest rate environment. The ECB cut its key deposit rate by 1 percentage point to 3 per cent last year and is seen by the financial markets reducing it further to 1.75 per cent by the end of 2025.
Deutsche Bank sees Bank of Ireland’s net interest income falling 6 per cent this year to €3.32 billion and PTSB’s result falling at a similar pace to €580 million, outperforming AIB due to the mix of their respective businesses.
What’s in store for 2025?
Mr Noble has reiterated his buy recommendation on Bank of Ireland shares and retained its hold stance on PTSB.
Bank of Ireland’s shares have fallen more than 2 per cent over the past year, driven in part by concerns over a likely compensation bill stemming from a UK regulatory review into commission practices among motor finance providers. Bank of Ireland has a 2 per cent share of that market.
Deutsche Bank said it expects a resolution to the review “ultimately will end up a positive” for Bank of Ireland.
Meanwhile, AIB was among a number of European banks that moved on Tuesday to take advantage relatively low borrowing costs to sell the riskiest type of bank debt – known as additional Tier 1 (AT1) bonds – that are used as part of the capital reserves lenders must hold to absorb surprise losses.
The bank raised €700 million from the sale of such bonds – having fielded more than €3.9 billion of orders from investors. The new notes have been priced to carry a coupon – or annual interest rate – of 6 per cent. AIB has a right to redeem some €625 million of existing AT1 notes in June.
London-based Standard Chartered and Spain’s Banco Bilbao Vizcaya Argentaria were also in the AT1 bond market on Tuesday.
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