Narrowing pension gap boosts Bank of Ireland dividend hopes

Bank of Ireland's hopes of returning to paying a dividend early next year, for the first time since the start of the financial crisis, have been improved as its pension deficit is likely to have narrowed in the second quarter of this year, according to analysts at Deutsche Bank.

The State’s largest bank by assets warned in April that its pension deficit, which has been very volatile in recent years, had widened by €200 million to €650 million in the first three months of the year as corporate bond yields, which companies use as a discount rate to value pension schemes, had fallen during the period.

"However, corporate bond yields rose toward the end of the [second] quarter and we now expect the pension deficit to revert back to about €450 million in the first half," said Deutsche Bank analyst David Lock in a note to clients on Monday in which he rated Bank of Ireland's stock a "buy" with a price target range between €7.15 and €7.40.

Capital ratio

The narrowing of the deficit and retained profits during the quarter will serve to boost the bank’s common equity Tier 1 capital ratio, a gauge of a bank’s ability to withstand surprise losses, by 0.7 percentage points to 12.7 per cent.

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"This puts Bank of Ireland in a good position to begin restarting dividends at full-year 2017 results – ie paid in March 2018," he said.

Bank of Ireland decided in February to delay by a year a return to paying a dividend for the first time since 2008, due to vulnerability of its pension scheme to volatility in the bond markets. AIB and Ulster Bank each resumed dividends last year.

The deficit of the defined-benefit schemes, where pension payments are linked to final salary, doubled in the first nine months of last year to €1.45 billion, before sliding as bond yields rose in the final quarter of 2016, driven by inflation and rate hike expectations in the wake of Donald Trump’s election as US president.

Mr Lock said Bank of Ireland’s forthcoming first-half results, due to be released on July 28th, will also be watched for comments on when the bank will finally return to loan growth after years of contraction during the financial crisis, as well as lending margins and costs, as the company continues to upgrade its computer systems.

Deutsche Bank sees the bank’s net loan book falling to €78.3 billion from almost €78.5 billion in December before rising to €78.5 billion in the second half of the year.

Shares in Bank of Ireland had a choppy performance in the early part of Monday's session on the Irish Stock Exchange, hovering between as much as a 0.4 per cent gain and 1 per cent decline. They closed 0.4 per cent higher at €7.208.