Credit growth to disproportionately benefit Bank of Ireland - Goldman Sachs

Strong housebuilding momentum along with increasing house prices will allow for credit growth in the Irish market, something that will disproportionately benefit Bank of Ireland (BoI) over its Irish peers, Goldman Sachs said in a note.

The US investment bank upgraded BoI to a “buy” rating from “neutral” as it expects loan growth in the market to run positive. That, it said, will disproportionately benefit the bank given its expanding distribution.

At a recent investor day BoI said it plans to grow net loans by 20 per cent over the next four years with the retail business the largest absolute contributor.

In a client note Goldman Sachs analyst Martin Leitgeb updated his estimated "steady state" level of gross mortgage lending to roughly €13 billion, "chiefly due to stronger housbuilding momentum combined with house price growth".

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“Our base case assumes that this steady-state level is reached by 2021,” he wrote.

Growth

Compared to AIB, Bank of Ireland is expected to have a higher growth rate of about 5 per cent per year. AIB's rate was estimated at 3 per cent.

Goldman Sachs said it remains “neutral rated” on AIB in the context of its European banks coverage. “We expect AIB to return significant excess capital over the forecast period, and as such the stock is likely to have a particular appeal to income focused investors.”

Aside from benefitting from mortgage growth, Goldman flagged BoI’s “stated ambition to reduce costs each year” as a positive.

"With five main players, the structure of the Irish banking market that emerged following the financial crisis is among the most concentrated in Europe. Current new business mortgage rates in Ireland are among the highest in the euro area.

“However, we believe recent sequential pricing reductions demonstrate a focus on maintaining share by market participants that do not want to miss out on the potential revenue upside from faster credit growth,” Goldman said.