Impact of Brexit evident in Bank of Ireland’s results

Bank of Ireland chief executive Richie Boucher must be cursing former UK prime minister David Cameron for his decision to hold a referendum in June on membership of the EU. The shock result to leave the EU has created all sorts of uncertainty around economic growth, with the ripple effect evident in Bank of Ireland's half-year results yesterday. The UK accounts for 40 per cent of its balance sheet and 25 per cent of its income.

It has already had a negative accounting impact on the bank’s pension deficit, and Boucher signalled that it could affect the timing of a dividend payment.

Bank of Ireland has not paid a dividend since 2008, and had flagged to the markets its goal to recommence payments in 2017. "We strongly believe that we should be an income stock," Boucher said.

That ambition “remains unchanged”, but the Brexit result may impact the timing of the payment. It’s not off the table but it could be either delayed or reduced in quantum.

Expectations

Bank of Ireland’s results were ahead of expectations in spite of a 25 per cent reduction in its underlying profit to €560 million.

This was largely due to a lower impairment charge and a higher gain on the sale of its stake in Visa Europe than previously forecast (€106 million versus €75 million, according to Davy’s numbers).

There was also a substantial jump in regulatory charges during the period, which amounted to €62 million in the first half of 2016 compared with €27 million a year earlier.

There are signs of momentum in lending across the business. It secured a 28 per cent share of new mortgages in Ireland in the first six months, although this lending is being constrained by a lack of supply and the Central Bank’s macro-prudential rules.

Boucher welcomed the Government’s recent housing plan, designed to boost supply, but said it could be two years before the industry had the capacity to begin meeting these targets.

He is also not for turning on reducing its variable mortgage rates, preferring to offer fixed rates instead. “We don’t take interest rate risk,” he told media, while accepting that this has brought “political flak” from legislators who have been pressing the banks to reduce their variable rates at a time when the ECB’s headline rate is almost zero.

“We think variable rates are a risky product,” he said.

Variable rate

Boucher said variable rate customers can transfer to its lower cost fixed rates, with about 15 per cent of them switching to date.

Reflecting the continuing improvement in the credit quality of its loan portfolios and actions to manage non-performing portfolios, the net impairment charge reduced to €93 million, down 21 basis points, in the first six months.

In the short term, the Brexit result will continue to overhang the bank. The full impact of the referendum result will not be known for some time to come, which is an unwelcome state of affairs for the bank and its shareholders, particularly if the dividend payment is put on ice.