BoI eyes Davy and KBC boost after estimate-beating results

Bank of Ireland's chief executive says the group's planned acquisitions of most of KBC Bank Ireland and of Davy should see it beating its long-term profitability target.

Francesca McDonagh made the comment as the lender reported a better-than-expected first-half profit on Tuesday and the State confirmed that it had sold almost 1 per cent of the bank in the stock market in recent weeks, lowering its holding to 12.98 per cent.

Ms McDonagh also dismissed concerns about risks associated with taking over Davy’s key capital markets and wealth management businesses in the wake of a bond-trade scandal that resulted in a €4.1 million fine for the stockbroking firm.

The bank’s outlook for 9 per cent total income growth and close to zero loan-loss charges for 2021, compared to €1.1 billion being set aside last year amid the Covid-19 shock, has prompted analysts to start raising their full-year estimates for the group. Shares in the bank jumped 7.8 per cent to €4.83 in Dublin.

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“Our results today, and our outlook for the future, are radically different to 12 months ago,” said Ms McDonagh. “In the first half of 2021, we have had a strong recovery in our business performance. We’ve continued to deliver our strategy, including investing in digital and transforming our business.

“While Covid-19 is still with us, there is a path to recovery. Comprehensive vaccination programmes are unlocking the vice-like grip that Covid-19 has held over our economies and society. Our economic outlook is increasingly positive with sentiment back to pre-pandemic levels.”

Bank of Ireland swung into an underlying pre-tax profit of €465 million for the first half of the year, compared to a loss of €669 million for the same period in 2020. The result was driven by the bank's loan impairment charge which, for the period, came to €1 million, down from €937 million. The lower charge for this year "reflects the improved economic outlook and muted loan loss experience in the period", it said.

Total income rose 14 per cent year on year in the six months to June, helped by a turnaround of the group’s UK business and solid new lending in the Republic – even though its share of the mortgage market dipped to 23 per cent, from about 25 per cent last year.

It was also boosted as the bank continued its strategy of increasingly passing on negative interest rates being charged by the European Central Bank (ECB) on excess deposits to customers, and as it raised €10.8 billion in March from a ECB lending facility – known as TLTRO III – where banks can borrow at rates of as low as minus 1 per cent.

Bank of Ireland signalled earlier this year that it was lowering the threshold at which the 0.5 per cent ECB negative interest rates will apply to customers, from €2.5 million to €1 million.

KBC and Davy

Bank of Ireland said its capital reserves are more than sufficient to support the purchase of KBC Bank Ireland’s €9 billion of performing loans as the Belgian lender retreats from the market, as well as the acquisition of most of the business of Davy in a deal worth up to €480 million. Both planned acquisitions were announced in recent months.

Ms McDonagh told analysts on a conference call that the deals should help the bank reach its “north star” long-term profitability target – of achieving a profit return of more than 10 per cent on shareholders’ equity – sooner, and may result in it ultimately surpassing the goal. The bank’s return on tangible equity stood at 6.6 per cent in 2019, before the pandemic. Analysts see a ratio of between 8 per cent and 10 per cent as a sign of a healthy bank.

Ms McDonagh said the group carried out “robust due diligence” when bidding for Davy, after the securities and wealth management firm was put on the block in March in the wake of a bond-trade debacle, and that she sees “great value” in the Davy brand and the business.

“I feel incredibly positive about the Davy business,” she said, adding that it “ticks the boxes” of offering value for shareholders and also being a “good fit”, with its €16 billion of clients assets under management, comparing with €21 billion at the bank’s existing wealth and insurance units.

The bank’s capital reserves, or common equity Tier 1 capital (CET1) ratio, stood at 14.1 per cent at the end of June, up 0.7 percentage points on the year, and well ahead of regulatory requirements.

The bank said it will also have money for shareholder distributions to recommence “on a prudent and progressive basis based on performance and capital outlook”. Analysts broadly expect the bank to return to paying dividends early next year after a two-year hiatus amid the Covid-19 crisis.

“Bank of Ireland’s results are ahead of our expectations on income and capital, and guidance is a very material increase to both ours and consensus expectations,” said Deutsche Bank analyst Robert Noble.

Goodbody Stockbrokers analyst Eamonn Hughes said that he expected to raise his full-year pre-tax forecast by 50 per cent on the back of the bank’s income and loan impairments outlook.