Bank of Ireland investors value UK unit at zero, analyst says

Investors in Bank of Ireland are currently valuing the group's underperforming UK business at zero, according to an analyst with Bank of America Merrill Lynch.

"It is hard to avoid seeing [Bank of Ireland's] UK operations, which account for almost 40 per cent of assets, valued at nil," said Bank of America Merrill Lynch analyst Alastair Ryan in a note sent to clients on Thursday, adding that the unit's margins are "challenged", even if it did make a £161 million (€181 million) pretax profit last year and is low risk, mainly made up of mortgages.

The analyst, who has upgraded his rating on Bank of Ireland’s stock to outright buy from neutral, has suggested that the UK unit may deliver value that is currently unrecognised by the market – saying investors buying into the stock now are essentially getting the UK “for free”.

“The option value of the UK is positive, we believe,” he said, while cautioning that the unit, which makes up about 12 per cent of group earnings, “faces heightened risk”.

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Bank of Ireland named former Royal Bank of Scotland (RBS) executive Ian McLaughlin last month as the next chief executive of its UK division, putting him in charge of delivering group CEO Francesca McDonagh's plan to expand the unit's loan book by 10 per cent and double its profitability – measured as return on equity – by 2021.

The target is premised on the UK exiting the European Union with a withdrawal agreement and transition arrangements in place.

The growth is expected to be driven by an increased focus on higher loan-to-value mortgage offerings to first-time buyers and equity-release loans to seniors, which are seen as more profitable than mass-market products. The bank is also currently selling its capital-intensive €600 million UK credit cards portfolio in order to boost its returns on equity.

However, analysts have been largely sceptical of Bank of Ireland’s UK growth ambitions in a very competitive market, where it counts among a number of challenger consumer lenders offering products through the Post Office, the AA and through brokers.

Bank of Ireland has a wider goal of growing the group’s total loan book by 20 per cent by 2021. The company is also currently in the middle of a €1.4 billion information technology (IT) overhaul and restructuring plan.

Shares in Bank of Ireland have fallen by about a third to €4.66 since the medium-term targets were outlined 12 months’ ago, with sentiment towards the wider sector dampened by expectations that official interest rates will remain lower for longer.

The European Central Bank (ECB), which was expected late last year to begin increasing rates from the second half of 2019, moved earlier this month to push out the prospect of an interest rate increase to at least the middle of next year. On Tuesday, ECB president Mario Draghi hinted that the next rate move may actually be downwards.

ECB rate expectations have been “weighing heavily on Bank of Ireland,” said Mr Ryan.

Still, the analyst estimates that following the “heavy lifting phase” of the core IT system replacement, Bank of Ireland will be able to turn an estimated 12 per cent increase in revenues between 2019 and 2022 into almost 60 per cent earnings growth.